Tech-driven insurance solutions to help bridge the $180 billion protection gap

2017 was an extreme year for natural disasters. Hurricanes, floods and wildfires in the United States, earthquakes in Mexico and the Middle East and floods in Africa and Asia claimed lives, ruined homes and put economies under stress. In the US, a record of three category 4+ hurricanes made landfall within the space of four weeks – Hurricanes Harvey, Irma and Maria. Insured losses from these events, plus two significant earthquakes in Mexico, are estimated at $95 billion. Total losses from natural and man-made disasters in 2017 are expected to be $306 billion – up from $187 billion in 2016.

The recent disasters draw attention to the enormous gap between what's insured, and what's not – we call this the protection gap. In 2016, the protection gap amounted to around $180 billion globally for natural catastrophe and weather risk – $81 billion in Asia alone. Moreover, the problem goes beyond natural disasters. There is a substantial gap in life and health insurance cover. And digitization – alongside the opportunities it brings – also creates new risks which are not sufficiently insured. Developed countries are not exempt and, in fact, the protection gap is widening. In addition to the costs for people and businesses, this can create a significant and long-term financial burden for governments.

As the digital revolution changes the world – and with it the re/insurance industry – technology will play a major role in closing the protection gap. But real progress can only be made provided there is a joint effort between the public and private sectors. When considering innovative ways to increase insurance coverage – and ultimately communities' resilience – Swiss Re looks at the protection gap in three main categories.

The protection gap seen three ways

The first way is where there is no insurance available – for example, in some developing countries. In Northern Kenya, livestock farmers previously had no access to insurance against drought, leaving their cattle at risk as well as their own livelihood. In 2016, Swiss Re supported the launch of the first ever government-backed livestock insurance scheme in Kenya, protecting 14,000 farmers. The programme uses satellite imagery to assess the state of grazing conditions by measuring deviation in the colour of ground vegetation. When a certain threshold is reached, the insured farmers receive a lump sum payment – the majority via their mobile phones – which makes the value chain cost effective. Similar innovative insurance schemes could work in other parts of the world, too. The Kenya Livestock Insurance Programme is a good example of how collaboration between governments, development organizations and the re/insurance industry can bring innovation to bear.

The same goes for the second category of the protection gap, which is where insurance is available but people cannot afford it – this is often the case in China. Recently, the Chinese government took a huge step forward in recognising the value of re/insurance as a risk transfer mechanism. Now, the government proactively encourages provinces to use part of their budget to buy insurance. Launched in 2016, Swiss Re supports a natural disaster insurance scheme in Heilongjiang province which covers 28 counties against flood, excessive rain, drought and low temperatures. It's the first of its kind in China and, like the programme in Kenya, it uses satellite and weather data to allow for quick payouts. The scheme is a great example of how a public-private partnership can address government-assisted poverty alleviation. There is great potential to scale this scheme across China.

Digital advisors to the rescue?

The third category is more difficult to crack. It's where insurance is available, and people could afford it, but still don't buy it. This is a problem in many places in the developed world. In California, there is a 48% chance that a 7.5 magnitude earthquake will strike in the next 30 years. Yet, only 12% of homes that are insured for fire are also insured for earthquake. There are many possible reasons for this. Optimism bias may play a role, where people think "it won't happen to me". It may be due to lack of awareness, cost or complexity of buying insurance, lack of trust in the insurance industry, or that people expect the state to pay out following a disaster.

It is possible to address these hurdles individually – for example, by using technology to reduce the cost of the value chain so that insurance products become more affordable. Also, big data may allow us to price previously uninsurable risk since it allows us to better understand risk. But a broader solution is needed. Digital advisors – a personal advisor accessible via a digital device – may be the answer. With their development over time, people may begin to trust digital advisors with financial decisions, including what insurance would be necessary to purchase. A digital advisor could help overcome many of the hurdles and narrow the protection gap. But this will take time.

Digitization clearly has a profound effect on how to mitigate and manage risks. Although the protection gap itself is not new, technology brings new and promising opportunities to close it. That is what we're focused on at Swiss Re – we exist to make the world more resilient. To really have an impact, the public and private sectors will need to collaborate on innovative solutions, as we are doing in Kenya and China. There's still a long way to go, but now is the time to ramp up our efforts to support healthy economic development and the well-being of society.