Knowledge Gaps and Convergence

Insurers covered $500 billion in catastrophe losses in the last 10 years. That huge number appears in Swiss Re’s recent sigma report, “Underinsurance of Property Risks: Closing the Gap.”

It’s hardly the biggest number in the report. There’s a $1.3 trillion figure for total economic losses from natural disasters that were not insured. Only 30 percent of nat-cat losses were insured over that time frame.

The report goes on to forecast the future. Using modeling techniques for cat perils, Swiss Re estimates uninsured losses of $153 billion per year going forward just for earthquake, flood and wind—excluding hail, drought, tornadoes and volcanoes. And using a benchmarking approach for noncatastrophe property (bringing countries with low insurance penetration up to best-practice levels) adds another $68 billion.

The tally: $221 billion of expected underinsured property losses annually, or $2.2 trillion for 10 years.

There’s some semantic detail in the report about whether this is correctly called a protection gap or underinsurance. Putting that aside, these are big numbers, and there is clearly an opportunity for insurers and reinsurers to provide coverage. But beyond that, there is an obligation for the insurance industry to teach what we know about risk.

Listing reasons for underinsurance, the report discusses issues like affordability and reliance on government post-disaster relief. Leading off the list, however, are factors like risk perception and lack of knowledge about insurance.

The magazine is available to Carrier Management members. Sign up here.

An online version of the article, “Building a New Business Model at Blue Marble Microinsurance,” is also available to Carrier Management members here.

Insurers are now collaborating to figure out how to deliver low-cost microinsurance—and education— to some of the poorest citizens on the planet. Blue Marble Microinsurance CEO Joan Lamm-Tennant describes this in the cover story of the fourth-quarter edition of Carrier Management magazine.

But underinsurance is not confined to emerging markets. Swiss Re expects annual uninsured property losses of $60 billion in the U.S. and Japan. In addition, Robert Hartwig, president of the Insurance Information Institute, offered these facts about U.S. buying behavior during a Swiss Re webinar:

Take-up rates for cyber and terror insurance—52 percent and 62 percent—exceed a take-up rate of 40 percent for renters insurance, 10 percent for California earthquake and 14 percent for national flood.
In areas most vulnerable to flood—the South and the Northeast—homeowners are least likely to understand that homeowners policies do not cover hurricane flooding.

While risk awareness for manmade perils is increasing, Hartwig stressed the need to combat misinformation in other areas. He also suggested that price hikes have caused flood insurance purchases to plummet 10 percent since 2009.

The full interview with Michael Sapnar is available here.

Separately, during a recent interview, TransRe CEO Michael Sapnar explained how convergence of traditional reinsurers and alternative capital may help drive down costs and lessen the role of government in the insurance business.

With convergence may come more opportunity for insurers to educate. At least, that’s my takeaway from remarks delivered by “Black Swan” author Nassim Nicholas Taleb at KPMG’s recent insurance conference. Discussing the difference between tail risks and well-behaved risks (for which the portfolio effect works), he said, “You guys know which is which. People in finance, they don’t know,” adding that insurers learned how to lose money from financial types during the financial crisis.

Related articles