“The Protection Gap”: A marketing slogan or a development need?

​The first ISCM Zurich event that has taken place for several years was in mid-September, and the subject provoked some interesting discussion: “The Protection Gap: a marketing slogan or a development need?”. In the Q&A style of our panel discussion, here’s an overview of the event:
 
What was the conclusion? Is the Protection Gap a marketing slogan or a development need?

The overall conclusion from our presenters, Margareta Wahlström (former head of the UN Office for Disaster Risk Reduction) and Daniel Hofmann (Geneva Association) is that there is a definite development need.  Through his presentation (posted in the members’ area on this site), Daniel demonstrated how insurance works to stabilize the economy after disaster strikes.

Our panel, which consisted of leaders from across the insurance industry, agreed with our presenters. Michael Roth, from Munich Re, commented that he would argue that the ‘Protection Gap’ is both a marketing slogan and a development need, and we should not shy away from this. One or two members of the audience challenged the consensus and suggested it is a marketing slogan, particularly due to the lack of trust of the insurance industry by consumers.
 
The event was about encouraging practical actions. What guidance was given to catastrophe managers from the speakers?

1. Take an interest in influencing policy and innovation. Cat management knowledge is needed to develop robust frameworks

• Margareta Wahlström, former head of the UNISDR: “What is particularly interesting for the cat community in the Sendai Framework? It set targets on measuring disaster risk, on mortality, impact on infrastructure and early warning systems. The knowledge of how to do this is within this sector”
• Margareta went on to advise not only to go for representation at the top events. There are several smaller events, such as technical advisory groups, where there is more chance to influence. “Don’t just bring comments. Generate ideas and bring these – proactivity will be welcomed”

2. Influence terminology, both within the insurance and public sectors, to avoid confusion and make it easier to ‘speak the same language’

• When we first talked about this event, Margareta was particularly confused with the term ‘Protection Gap’. In the public sector, it is a well-known term in refugee law. To avoid further confusion and before the term is particularly widely used, she suggested renaming should be considered. What about the ‘Resilience Gap’?
• Terminology is being debated within the UN linked to the Sendai Framework for Disaster Risk Reduction. Cat managers can join working groups and influence this
• Margareta suggested the use of practitioners from the public sector as moderators for private sector events. They could look critically at language used and ensure clear communication

3. Promote risk education of consumers and the public sector, so educated decisions are made

• Pavel Huerta-Uribe (Swiss Re): “As a first step, there is much awareness raising to be had at the level of the final consumer. At the level of reinsurance companies, it is important to look at things from a consumer’s perspective.”
• Margareta Wahlström: “Working on education is critical and important. From a practical sense, cat modellers are best placed to develop these ideas”
• Our human disposition to misunderstand risk was raised. Not many people, or governments, have a long term outlook. To assist with this, Claire Souch (AgRisk) suggested people should promote the use of thinkhazard.org, which alerts people to the risks they face

4. Promote information sharing, to encourage the development of new markets, where lack of data is often cited as an issue

• Michael Roth, Munich Re: “There is a vested joint interest in sharing information, geared towards market development. Munich Re is willing to cooperate with peers to develop new markets. It will help sustain our business and address global issues”
• Andreas von Reitzenstein, Credit Suisse: “I encourage players in the industry to collect and share more data (e.g. like PCS / PERILS)”

5. Be an advocate within our organisations to push these types of strategic initiatives. Otherwise, little progress will be made  

• Paul Nunn, SCOR: “We need advocates within organisations. It is sometimes difficult to be allowed to work on things where there is no immediate commercial value. However, a recognition that this is strategic should be encouraged. Cat managers should work on selling the ‘it’s strategic’ message within their organisations. It might need some volunteer work at first”

If you attended, please also let us know of any further ideas and initiatives which have come from networking at this event.
 
Margareta Wahlström commented that, from an outsider’s perspective, the insurance industry is conservative, traditional and change happens only when triggered by external events. What innovative ideas are already out there and could be developed further?

Daniel Hofmann outlined different methods:

1. Microinsurance: “Does it do the trick? The short answer is no, as it only covers a small percentage, but it will likely be part of the answer”
2. Index insurance: “Payouts are quick, which promotes trust and delivers money when it is most needed. This can be used on the micro, meso and macro level.”
3. Alternative risk transfer, such as cat bonds – this is Daniel’s preference. He noted that most pension funds cannot buy a cat bond and suggested that more standard solutions, which could allow for different tranches to cater for a variety of investors. Andreas von Reitzenstein (Credit Suisse) promoted use of these instruments to dampen insurance cycles.

A few questions arose from this:

• Is insurance industry quick and nimble enough to get products out there which the consumers want and need?
• Is there an adequate supply of alternative risk transfer solutions?
• Can regulation encourage innovation and the development of the industry? An example where regulation is stifling industry development is in countries where premium is not allowed to be transferred out of the country, and this has the adverse effect of concentrating risk within that country
• Can insurance companies get over the mental hurdle of viewing developing countries as without business opportunity?

Margareta challenged the insurance community to work on its generation of ideas and putting these into large-scale action.  She stressed this is extremely important to build a sufficiently constructive relationship with the public sector, who currently see a constant promise of innovation, but not enough action from our sector.
 
What did the panelists see as the ‘next big thing’?

1. Resilience bonds

• What these bonds do is finance actions in resilience measures through savings in insurance risk
• Although no resilience bonds have yet been issued (although some are being worked upon – see here), Pavel Huerta-Uribe from Swiss Re gave an overly simplified illustration of the concept:
  • You are paying 1000 francs for a motor insurance policy
  • There is a technology which will decrease your risk on the road and make journeys 99.9% safe. However, it costs 10,000 francs
  • This would reduce your premium from 1000 to 300 francs
  • It makes sense but it is likely you can’t afford this technology today
  • However, a ‘resilience bond’ could finance actions in resilience (such as having this new technology) through savings in insurance risk i.e. you will be provided with this technology, if you agree to a 15-year policy, which allows the insurance savings to pay for the risk reduction measure: the ‘resilience’ investment
• This concept could be used in a variety of cases, for example investment in a flood defence
• For this to work, a value must be attached to the risk, before and after the resilience measure's implementation

2. Convergence of the public and private sector
​There are many initiatives that the private sector can provide to public sector challenges, including resilience bonds as discussed above

3. Risk models covering the globe

• There is a work stream in the Insurance Development Forum linked to risk modelling
• For the investor community, an accepted model is needed for differentiation. Investors look at an accepted model’s output rather than ratings when investing in catastrophe bonds for example

What initiatives should we look out for?                                                                                                                                   
There are two initiatives which were mentioned:

1. The Insurance Development Forum (IDF), which has several work streams – Paul Nunn and Claire Souch both sit on this.
2. The Technical Advisory Board is in the process of being developed, with the aim of cat management professionals sharing technical knowledge with non-traditional users. One to watch out for in the coming months…

 
Is an ISCM event going to happen again in Zurich?

We hope this will become a regular (annual?) event for the Zurich community to get together and discuss a topic which benefits from a wider perspective. From initial feedback, attendees are keen to have a topic which leads on from the ‘Protection Gap’. We would like to rotate the organisers to share the ownership of the event -  more organisers always welcome! 

*** For Daniel Hoffman's Presentation - Please See the Members Only Download Page ***