Trillion-dollar global protection gaps identified by GFIA report

A new report by the Global Federation of Insurance Associations (GFIA) has identified trillion-dollar global protection gaps in the areas of pensions, cyber, health and nat cats.

The report says these four areas stand out due to their growing economic importance, impact on human lives and insurability. The report quantified these annual global protection gaps, revealing that pensions there is a cumulative gap of $51trn for pension after deducting pay-as-you-go, which converts into an annuity of $1trn p.a. with a 1% interest rate over 40 years.

For cyber, it notes that first-order cyber losses ($0.95trn) minus paid cyber claims ($0.06trn) reveals a $0.9trn annual protection gap. For health, it shows that stressful out-of-pocket  health expenditure and estimated avoided costs are valued at between $0.8trn to $4trn annually. And it points out that around 60% of nat cat losses were not insured between 2011 and 2020, resulting in an annual protection gap of $0.1trn.

“Exploring the current protection landscape and analysing the protection gaps related to these risks is particularly relevant due to their substantial economic and human impact. While the insurance industry can contribute to reducing these protection gaps when the underlying risks are insurable, a single stakeholder group alone cannot narrow the gaps. Close collaboration between private and public stakeholders is necessary, as governments and other public entities can help build the appropriate regulatory environment, create fiscal incentives, or conduct public awareness and prevention campaigns, among other actions,” the report states.

The report identifies the factors driving these protection gaps both on the demand and the supply side, and provides an overview of the wide range of potential levers that can be used by a broad variety of stakeholders to address the gaps.

GFIA president Susan Neely said: “Insurers around the world play a vital role in helping to protect people and businesses from the risks they face, and to recover when those risks materialise. However, as this report highlights, a range of factors have led to huge and growing global protection gaps that could have profound impacts on people’s lives and livelihoods.”

She added: “Insurers can, and are, taking steps to address these gaps. These include using technology to assess risks and claims, and to make insurance more accessible for people and businesses. However, closing the gaps will also require action from policymakers to create environments in which risks can be managed and mitigated. These actions will help keep risks insurable and insurance protection affordable.”

The report includes GFIA’s own recommendations to policymakers of the best levers to use to reduce risk and increase protection. Recommendations for cyber are:

• Promote awareness of cyber risk and incentivise cyber-risk prevention;
• Promote an improved landscape of cyber resilience, particularly among critical infrastructure firms and assets;
• Create a harmonised cyber-incident reporting framework to gain better insight into the frequency and severity of major incidents;
• Facilitate the sharing of aggregated data with insurers and academics for the purpose of risk modelling and risk mitigation.

Recommendations for nat cats are:

• Support and make efforts to educate and inform the general public, businesses, communities and policyholders about the benefits of insurance;
• Ensure that strong and enforced land-use controls and building codes are in place to promote the resilient construction of buildings and infrastructure and, where appropriate, the use of green or reconditioned materials;
• Promote close cooperation between public and private sectors to close the protection gap;
• Promote insurance products tailored to local needs, in particular by fostering microinsurance when appropriate;
• Support open markets for (re)insurance. This will ensure the maximum amount of capital is available to close nat cat protection gaps and support competitiveness and innovation.

“The report makes clear the steps that are needed to reduce the protection gaps and to help people and businesses access the insurance services they need to succeed and thrive,” Neely added.