Addressing the protection gap: challenges and opportunities for (re)insurers

Contribution to the Eurofi Magazine - September 2022

The new EU strategy on adaptation to climate change highlights the fact that affordability and insurability of natural catastrophes insurance coverage is likely to become an increasing concern. Research shows that in the past only a quarter of the total losses caused by extreme weather and climate-related events across Europe were insured (EEA, 2022) indicating a large insurance protection gap in Europe. Improved climate projections provide further evidence that future climate change over the coming decades will increase climate-related extremes (e.g. heavy precipitation, droughts, flood…) and thus the related protection gap, if no measures are taken.

It is therefore key to understand the insurance protection gap and identify where it comes from. EIOPA’s therefore developed a pilot dashboard which shows the insurance protection gaps for many natural catastrophes in Europe. The dashboard aims to represent the drivers of such climate-related gap in order to identify measures that will enhance society’s resilience in the event of natural catastrophes. At the same time, the pilot dashboard should also help increasing the awareness and promote a science-based approach. 

Protection gaps cannot be addressed by increasing insurance penetration alone. It goes without saying that the best solution is to reduce the causes of climate change. More specifically many non-life products have short-term duration of contracts which allow them to re-price annually, which also means that they may be able to adjust the price if the risk changes. However, in light of the increasing frequency/intensity of some events, annual repricing may lead to insurance becoming unaffordable and might disincentivise consumers from taking up insurance thus increasing further the insurance protection gap. 

Pro-active measures on buildings vulnerability, localisation of exposure and optimised insurance coverage will be important elements of a resilient society. (Re)insurers, as society’s risk managers, can contribute to reducing climate change risks. Some insurers are already doing so in multiple ways, for example by providing advices on adaptation measures to policyholders. In its concept of impact underwriting, EIOPA aims to capture the options for implementing climate change adaptation and/or mitigation through pricing and underwriting.

Another important aspect to close the protection gap is addressing demand side issues for the uptake of insurance products. As consumers might not fully understand the coverage they buy, expectation gaps may arise. These expectation gaps can be detrimental to consumers and impact their trust in the insurance sector. EIOPA has issued a Supervisory Statement to promote contract simplicity but also to ensure a more customer-centric approach to the treatment of exclusions following large-scale events.  Beyond exclusion-related issues, affordability is bound to be a significant barrier. Consumers tend to underestimate the losses and/or probability of a disaster, and therefore they might find the benefits of insurance cover unattractive relative to the premium/cost of the policy. Hence, it is also important to raise awareness about the risks some consumers may face.

Finally, it is important to note that (re)insurers as underwriters and investors can be particularly impacted by climate change. EIOPA has therefore assessed the materiality of the insurance sector exposure to physical climate in its recently published report. The study reveals that in-sample insurers have been historically well placed for handling the ensuing claims. However, insurers expect all property-related lines of business to be impacted by physical climate change risk and that premiums are likely to increase. 

Climate change is a growing risk for the insurance sector but also creates vast opportunities for insurers to be part of the solution to address climate change risks. In particular, they can play a valuable role in keeping cover affordable for policyholders. Indeed, with data, innovation and incentives, insurers are helping businesses and people prepare for the future risks.

Thanks to Marie Scholer for her contribution to this article.