Closing the insurance protection gap 

OVERVIEW

The majority of the world remains without financial protection across all areas of life. The protection gap between what is insured and uninsured continues to grow, with financial risk management rapidly outpaced by rising risk, hazard and shock. Climate change and environmental degradation are forcing us to attach greater value to what used to be taken for granted, like clean air, forests, water and biodiversity. Which of these tangibles and intangibles should we be insuring and assuring for the future? And who should pay the premiums as lives get longer and richer?
 

SIGNALS

Everywhere, risks are increasing – from climate change, geopolitical tensions, economic shocks – yet most of the world remains uninsured against them. Extreme weather events caused $360 billion of damage worldwide in 2022, but only 40% was covered by insurance. Some things are becoming uninsurable. The largest homeowner insurer in California has stopped accepting new customers because of growing catastrophe exposure, including wildfires. Floods and other climate risks are driving insurers out of other US states. Homes that cannot be insured will lose value.

Insurance is essential to protect people and planet and to incentivise investment and growth. Countries with greater insurance coverage have faster economic recoveries from disasters and rebuild with greater resilience; a 1% increase in insurance coverage can reduce national disaster recovery costs by up to 22%. Risk sharing is crucial to increasing protection for developing countries most affected by climate change yet least able to bear the burden. Lloyds of London and the United Nations Capital Development Fund are teaming up to improve access to insurance for Pacific island states and other climate-vulnerable countries. High-profile cases like the FSO Safer operation demonstrate the role of insurance in preventing environmental and economic disasters.

The kinds of things people want to insure are changing. People are attaching greater value to what used to be taken for granted, like clean air and water. Digital tools let them measure it, for example AireLibre air quality sensors407 in Paraguay that provide real-time data on air quality via a network anyone can join. Natural resources are being insured, like a 100-mile coral reef in Mexico.  Brazil has proposed “Tropical Forests Forever,”a new fund to pay countries to maintain and restore rainforest.

Alongside changing values, digital tools are changing the insurance market.  Insurance companies can use AI and digital platforms to offer hyper-personalized and real-time risk protection. Digital tools are also empowering consumers in new ways, like decentralized networks that allow groups of friends to pool risks, in another iteration of the sharing economy.
 

SO WHAT FOR DEVELOPMENT?

Closing the “protection gap” - between what is insured and uninsured – is vital to development and for fairness to future generations. New insurance solutions for climate risks, low-income pre-retirees and gig workers can make societies more resilient, for example by alleviating pressure on public pensions. But rising risks can make insurance unaffordable. Flood Re, an initiative between the UK government and insurers, makes the flood part of homeowners’ insurance affordable for those in high flood risk areas. Such public-private partnerships could be applied in developing countries to share the costs of risks borne by the most vulnerable.

We cannot predict the kinds of things future generations will want to insure, but today’s changing demands offer some clues. Younger people want to insure digital assets like virtual goods and avatars and protect themselves against identity theft. Consumers want not just risk coverage, but risk prevention services, like health coaching or rewards for safe driving. Insurance products that reward healthy living could appeal to younger people. So could peer-to-peer insurance, pooling risks among friends or communities, like Laka, an insurance collective for cyclists.