The worldwide protection gap keeps growing. What can insurers do about it?

EY’s Isabelle Santenac on the (re)insurance sector’s role in addressing the global protection gap.

The huge insurance protection gap that exists around the world continues to expand. Insurers and government authorities increasingly recognise that people and businesses have far less protection than they need. That’s especially true relative to climate-related risk, but social protection gaps are growing, too.

In 2021, the Swiss Re Institute estimated the global insurance gap at $1.4trn, a doubling since 2000. In 2022, global economic losses from natural disasters reached $313bn, according to EY research. Of that, only 42 percent, or $132bn, was insured. The annual average of 180 natural disasters per year during the last decade is the highest ever recorded. Emerging and developing economies face the largest gaps, due to limited availability of coverage, lower risk awareness and other factors.

Further expansion of the gap is a certainty, given the increased frequency and severity of natural catastrophes. Extreme temperatures in the US this summer have disproportionately impacted socially vulnerable populations that lack air conditioning, are forced to work outside, or need additional support to manage disease or disability. High inflation further restricts their ability to obtain insurance. Inflation will also widen the protection gap by driving up the values of buildings, vehicles and other insurable assets, and by producing higher claims costs, especially those related to construction.

Many insurers have exited high-risk geographies, because it’s become too difficult to accurately assess and profitably price climate risks. Others have reduced capacity due to a hardening reinsurance market. We believe these are short-sighted moves – simply covering “good” risks will only expand the protection gap and undercut the industry’s fundamental purpose of providing protections.

To be clear: insurers have taken many steps – from variable pricing and more precise risk modelling to transparent information sharing about exposures – to address climate risks. These efforts should continue. But there’s more to do if insurers are to capture new revenue and boost profits, while closing the protection gap.

New products and services (e.g., multi-peril crop insurance, parametric policies) are essential to prevent food crises caused by severe weather, as are alternative forms of risk capacity (e.g., cat bonds, insurance-linked securities). Advanced technology, such as AI-enabled modelling tools, can link index insurance with traditional mechanisms to reduce risk. Predictive tools can provide advance notifications of seasonal weather patterns and potential storms.

In partnering with public sector agencies, the industry can help educate individuals, businesses and communities about the need for protections. It can provide tools to reduce carbon outputs and promote greener behaviours. Insurers and reinsurers should also look to collaborate with governments to transfer financial risks, working across the entire value chain to address underlying risks, rather than acting as “pure carriers”.

In all of these endeavours, insurers should be careful to avoid both greenwashing (positioning their offerings and efforts as more eco-friendly than they actually are) and greenblushing (downplaying or concealing their efforts in support of a greener economy). The industry needs to be the catalyst for helping society at large to change its behaviour and prepare a better future for the next generations.

Isabelle Santenac is global insurance leader at EY