Public Sector Risk Financing Perspectives in Europe/Middle East/Africa: Part IV: Closing the Protection Gap
Charles Whitmore, Managing Director
These trends are likely to support broader product offerings and greater market stability around which the private sector may close the protection gap in EMEA and in other regions:
• Harness the global insurance industry’s capability to implement risk transfer solutions and promote risk mitigation measures.
A successful public/private approach to managing disaster risk, and the potential impact of climate change requires the meaningful engagement of a wide spectrum of stakeholders to ensure that any solution is appropriately focused and sustainable over the medium term. The insurance industry has a critical role in this initiative because of its ability to use data to identify risk and employ cutting-edge modeling software to quantify, price and underwrite risks - providing the mechanism to effectively spread and diversify risk worldwide.
The insurance industry has a pivotal role in educating and incentivizing its policyholder base to employ risk mitigation measures in order to improve societal resilience to weather-related risk. In April 2016, the United Nations Secretary General hosted a high-level meeting to address the topic of resilience. Subsequently, the Insurance Development Forum (IDF) was formed, on whose steering group, Dan Glaser, President & CEO of Marsh and McLennan Companies, sits. The IDF is an industry-wide body that will engage international entities to work together to achieve a “better understanding and utilization of risk information that could help governments in better deployment of their resources to build resilience to protect people and their property.” (1)
• Enhance Public/Private Partnerships.
An integrated and coordinated approach between the insurance industry and governments is increasingly recognized as the most effective means of creating sustainable and effective risk transfer mechanisms. The approach involves greater strategic dialogue between governmental departments, non-governmental organizations, the scientific and academic communities and, of course, the insurance industry to promote a multifaceted approach to disaster risk management and the implementation of insurance solutions. A joint collaboration may develop the capacity to share complementary expertise that enables communities to better assess and understand risk; put in place ex-ante prevention and resilience measures; combine resources to create effective risk transfer solutions; and enable societies and communities to dramatically speed their recovery, post-loss.
• Improve data collection efforts.
One of the fundamental consequences of an absence of a functioning and comprehensive insurance market is the resulting lack of useable data. Historically, there have been insufficient efforts to systematically collate data relating to risk exposures in developing and emerging economies. Swift economic development and the resultant dramatic escalation in insurable values exposed to natural catastrophes, coupled with rapid urbanization in coastal areas and a significant increase in global interconnectedness may mean that data quality in many emerging economies is limited at best.
Collecting reliable exposure data will help identify areas of underinsurance, enabling policymakers and non-government organizations to develop risk transfer mechanisms and focus on segments of the population most at need.
• Product transparency and innovation.
The fundamental factors that most contribute to the protection gap, such as low insurance penetration and lack of insurability, must be addressed at the source. Some insurance products may be too complex for promotion of increased uptake, language may be confusing and/or archaic and myriad exclusions and clauses may be difficult to understand. As a result, there is significant room for policyholder misinterpretation, potentially leading to voided and non-responding policies. The distribution of insurance products also needs to become more streamlined, more cost-effective and more user-friendly from the customer’s perspective. The use of emerging technology is critical in creating a cheaper and more customer-friendly insurance purchase experience.
Insurers need to innovate by anticipating emerging risks such as new technologies and previously unknown risks; new products they develop in response to those risks may ensure that society is more resilient to significant loss scenarios and create opportunities for growth.
1. IDF Press Release, April 2016.