Accelerated settlement is crucial to closing the coverage gap

Accelerated settlement is crucial to closing the coverage gap 1920 1080 Neil Eckert

When disasters hit, insurers need to respond quicker than they are currently minded to do. Accelerated claims settlement can significantly reduce economic loss and suffering

“Those who have no share in the fortunes of the mighty often share in their misfortunes”.

In January 2010, Haiti suffered a catastrophic 7.0 magnitude earthquake with its epicentre bang in the middle of Haiti’s population density. The event killed around 160,000 people and left around a million Haitians homeless. More than half of those were still living in temporary camps two years later. The aftermath was unimaginably horrific: an entire country left without running water, electricity or meaningful healthcare.

An event of this magnitude and devastation in the US would have caused hundreds of billions of dollars of losses, much of which would have been covered by the insurance industry. It would have been declared a federal emergency and would immediately have been supported by the Federal Emergency Management Agency.

“In a world focused on addressing climate change and social issues, the insurance industry needs to look in the mirror and think about its role in supporting solutions.”

But Haiti is one of the poorest countries in the world and the poorest in the western hemisphere. The earthquake caused an estimated $8bn of economic damage (30 million cubic metres of rubble), around 75% of GDP. Of this a pitiful 0.1% was collected in insurance claims.

Sadly, this horrendous event was no great surprise. Haiti sits on top of a highly active tectonic fault zone. It has suffered many earthquakes in its history. There had been several reports from seismologists predicting exactly this quake. They were not prepared for it because they could not afford to be.

Insurance penetration

In the US and most European countries, insurance premiums account for between 3% and 5% of GDP. Countries such as Bangladesh, India, the Philippines, Indonesia, Egypt and Nigeria have insurance penetration rates of less than 1%, according to Lloyd’s. Haiti was 0.1%. Of course some countries have more natural risk than others – Bangladesh and the Philippines are all in “typhoon alley”: regularly affected by typhoons and the related flooding. Indonesia sits on top of the “ring of fire” – the tectonic plate fault system that extends around much of the southern Pacific. Nigeria and Egypt have far less natural risk exposure.

Lloyd’s 2018 report, A world at risk, identifies a global insurance gap of $162.5bn. Of this, close to $2.5bn was in “developed economies” but the vast majority was in developing economies. The overall gap has been reducing in real economic terms but this has been achieved by richer countries buying more insurance and reducing their gap. The gap continues to grow in the developing economies.

This is exacerbated by the fact many of these developing countries are the ones that are being hardest hit by the increased frequency of climate-change driven claims – particularly flooding. Bangladesh and India have suffered recent devastating but largely uninsured flood events and China has suffered two of the largest flooding events in history during the past decade, also virtually uninsured.

Exclusions also lead to the coverage gap. Flood, for instance, is largely excluded from most insurance policies even in developed economies. In 2013, devastating floods that hit central Europe led to an estimated economic cost in Germany of $17.4bn. Of this only $4.4bn was covered by insurance, yet Germany is the home of the third- biggest domestic insurance market in the world. Flood is excluded in most US Gulf states’ retail insurance policies.

Following several years of unprecedented rainfall and consequent flood losses, in 2016 the UK was forced to establish Flood Re to help to bridge the gap between affordable insurance and market pricing. That gap was hugely affected by differential model-driven pricing, which allowed insurers to discern and compete for risks with less flood exposure at the expense of those who really needed it.

The industry has created its own coverage gap of “uninsurable losses”, even though normally the most profitable time to be insuring all of these “uninsurable” risks was the period right after the exclusions were applied.

The table shows the top 20 insured catastrophe events in the past 25 years.

Nat cats highlight the developing economies’ insurance gap

Buying the minimum

In addition, the world has a natural tendency to underinsure. People buy car insurance because it is a legal requirement, not because they worry about the economic consequences of a crash or a theft. Therefore they

spend a significant amount of time finding the lowest-cost product. Companies buy insurance because it is a risk management requirement, but we live in a corporate world that is always looking to minimise costs and maximise short-term profitability.

What is the upshot? Insurance is an industry that sells protection against uncertainties by mutualising risk. The capitalist world has become reliant on its product – you cannot drive a car, get a mortgage, do an initial public offering or run an airline without insurance – so in a world focused on addressing climate change and social issues, the insurance industry needs to look in the mirror and think about its role in supporting solutions.

Maybe there is a need to engage with supra-nationals in supporting infrastructure projects in developing countries and charities in providing post-loss support. This means not just signing a cheque when the bad things happen but providing “boots on the ground” as part of the cover. When my car is stolen, Direct Line provides me with a hire car until I get a new one. When disasters hit, the insurers should be providing the same level of support: accelerated settlement can mitigate claims and suffering.

To enable this, the industry should be able to deploy its technology and resources to collect data, the lifeblood of the industry, to enable a better initial view of losses. Developed countries already systematically collect every data

point imaginable, enabling accurate parametric triggers to be used for loss estimates. Losses arising from Florida hurricanes are known within days. In developing countries this takes months and still is not accurate. This must improve.

What else? Pay some claims. Quickly. In the race to profitability and premium valuations, the industry spends much time and effort on avoiding claims. But paying claims is good for business. We want to be encouraging our customer base to narrow the coverage gap by selling a truly value-added product they know they can rely on.

There are significant issues to address, but the answer lies in the insurance industry developing new products and more coverage, not exclusions. It just makes good business sense.