Nothing “secondary” about secondary perils
They could be the key to closing the protection gap
We all know about the protection gap, or at least, I hope so – it's the difference between economic and insured losses. But are we paying enough attention to what’s causing it to continue to grow? It’s not just because of big catastrophes like earthquakes and hurricanes. Increasingly, secondary perils like the fires that follow an earthquake and the storm surge that accompanies a hurricane are playing a larger role in driving up claims. A new sigma report from my colleagues at the Swiss Re Institute says close to 62% of all natural catastrophe-related insurance claims last year were from losses emanating from these secondary perils.
Worldwide, the Nat Cat protection gap stands at about USD 169 billion, which clearly has magnitude of real consequences. Within our industry, we spend a lot of time talking about how to narrow it, oftentimes from the standpoint of opportunity it presents, but we should also look at it from the consumer’s point of view: most people simply don’t have enough coverage for the perils they’re likely to face - this is a sobering reality. Whether you view it as an economist or as the average person, it’s the same problem with the same consequences: underinsurance threatens economies and a lack of resilience threatens our very sustainability.
Secondary perils are getting more attention because they are no longer as scarce as hen’s teeth, instead they are becoming more prevalent. Development in areas of higher risk such as coastlines and the wildland-urban interface puts more assets and people in harm’s way, where harm is increasingly defined as storm surge, wildfires or even the mudslides that can occur after wildfires. Some say secondary perils are a misnomer, because the terminology suggests they are not so important or deserve less of our attention. This is a good point, because nothing could be further from the truth. These perils represent what feels like the “new normal,” where more people and property are exposed to more frequent events.
Climate change is clearly exacerbating this problem, creating conditions that are conducive to these secondary perils. The summer of 2018 was one of the warmest and driest ever experienced in northern Europe which affected the Agricultural sector by reducing crop yields. Most of the resulting losses were uninsured - but as is the case with exposures of most types, they don’t have to remain that way.
The underinsurance problem can be solved by creating accessible and affordable products that address basic human needs – products that are much more customised to an individuals' needs and lifestyle. It starts with understanding the customer, using data to get a clearer picture of the risks they face and leveraging technology to create a frictionless customer journey.
Such a solution requires capital, knowledge and technology. It also requires unflinching resolve and determination. That’s where partnership comes into play, because it takes cooperation between the private and public sectors – working together to make our world more resilient. Recent examples are encouraging and more than a little inspiration to those who care about the future of our society, as we do.
- Thanks to cooperation between the private and public sectors, homeowners in Italy receive a tax credit when they purchase earthquake or flood insurance carried out by a host of partners including Swiss Re.
- Local governments throughout Europe can be better prepared for wildfires with funds provided by parametric insurance policies. Proceeds cover uninsured losses such as lost tax revenues, fire suppression costs and immediate infrastructure recovery efforts.
- Farmers can mitigate financial consequences resulting from flooding, drought or low temperatures. We are building partnerships, which allows growing conditions such as soil moisture content to be monitored using satellite images and weather data, and if certain triggers are met they receive an instant payout.
- In Germany, consumers can easily purchase a policy online that will protect them from losses caused by heavy rainfall. The product design is focused on facilitating a positive customer experience with the front-end and back-end platform technology allowing the cover to be finalised after just a few clicks of the mouse.
We can increase insurance penetration and provide relevant products because our understanding of the risks has improved exponentially. Global Flood Zones, a mapping technology developed by Swiss Re, generates high-resolution views that previously were simply not available. This development has enabled us to build a global flood rating tool for single risks and develop probabilistic models for various countries where no official flood zones exist. Armed with granular assessment of individual exposure, an underwriter can rate and price a flood policy with far greater confidence. These advances have led to the private market offering flood insurance in the US (consumers win) and improved risk selection (insurers win).
What good is all of the technological advancement, increased computing power and data analysis worth if we fail to understand the criticality of human behaviour? Perhaps insurance against secondary perils may become easier for consumers to adopt than comprehensive natural catastrophe insurance. Why? Because it’s harder to sell earthquake insurance to someone who’s never experienced an earthquake than insurance for flooding that one experiences annually. Human behavioural sciences offers us significant insights and must be part of the debate.
Tackling the challenge of secondary perils should result in a win for all stakeholders. Consumers and businesses get the protection they actually need at a rate they can afford, while insurers leverage technology to take on the risks they can handle and create a better customer experience.
I think we all recognise the significance of the protection gap. We know that if it is left unchecked it will continue to widen, thanks to climate change amongst many things. Now, we have identified an important contributor in the form of secondary perils, and by actively addressing our passion to protect society financially from them we hope we have unlocked another avenue to narrowing the protection gap.