Closing protection gap offers opportunity for insurance industry: Swiss Re

The global insurance industry has an opportunity to provide solutions and products in light of the considerable protection gap – the difference between economic and insured losses from natural catastrophes – that currently exists and could grow larger, Christoph Oehy, Swiss Re’s head of treaty underwriting and senior vice president of Property & Specialty, suggested Wednesday.

Worldwide, 60% of nat cat losses from 1980 through 2014 were uninsured, Oehy said during his luncheon address at Insurance Bureau of Canada’s (IBC) 19th Annual Financial Affairs Symposium in downtown Toronto. “This is a massive gap between the economic and the insured losses and it shows very well the insurance potential to close this protection gap,” he argued.

“Although 2013 and 2014 have been very benign natural catastrophe years, we can still see that the overall trend is upwards,” Oehy said. “It is interesting to note that, globally, weather-related losses are clearly the main driver.”

The same goes for Canada; in fact, it may be even more pronounced. There is opportunity to close the protection gap with regard to a number of perils, but two that are high on Canada’s radar are flood and earthquake, he suggested. For both, however, homeowner insurance coverage is lacking.

For example, 55% of Canada’s weather-related losses for 1980 through 2013 were uninsured. “This is an opportunity for our industry, and I truly believe, we can play an important role in helping Canadians coping with this protection gap for natural catastrophes,” Oehy told attendees.

The same can be said for earthquake, which he pointed out still represents the biggest loss potential in terms of severity for the country.

It important to remember the “impact of a major event is not only measured by its size or loss, but also by its relation to the economic production or GDP of the country or region in which it occurs,” Oehy explained. Citing the AIR Worldwide study commissioned by IBC, a magnitude 9.0 quake off the west coast of Vancouver Island would produce a protection gap of $55 billion, or 75% of the total economic loss.

With regard to flood, Oehy noted its definition is very broad and not always clear. Categorizing flood by location, there is fluvial or riverine flood (which is caused by an overflow of the river, such as was the case with the Calgary floods), urban or pluvial floods (which occur as a result of infrastructure in urban areas not being able to drain excess water flow, such as was the case in and around Toronto), and coastal flooding or storm surge (which occurs along the coast or large lakes, and is typically caused by hurricanes or strong winds). [click image below to enlarge]

“These three types of floods are very different in nature, but can all potentially lead to overland flooding or to sewer back-up,” Oehy told attendees.

Oehy said the starting point to make flood insurance for homeowners a possibility is to understand the risk. “The risk assessment for flood is complex and flood hazard maps are a necessary precondition to make insurance possible,” he said.

Based on fluvial flood exposure in Canada, Swiss Re estimates that about 9% of the residential insurable values are at risk of flooding at least once every 100 years and about 3% at least once every 50 years, while “almost 85% of the residential insurable values are only very remotely exposed to fluvial flood risk, meaning they are outside of the 500-year flood zone.”

But to be able to estimate the loss potential from an event or determine a PML (probable maximum loss) for a whole portfolio, “probabilistic flood models are needed. They allow getting the complete risk picture and help to understand the accumulation risk taking into account the correlation along the river network,” he explained.

“Flood insurance for homeowners has its challenges, but also offers opportunities,” Oehy suggested. On the opportunities side, it is agreed that there is a strong consumer need for a comprehensive water insurance product, flood insurance would help to close the protection gap, and “it could also lead to more transparency or clarity in the coverage water-related losses – reducing the reputational risk for the industry,” he said.

From Swiss Re’s perspective, what is needed to make homeowner flood insurance possible is that the product must respond to customer needs and be simple to understand, should be based on an adequate risk view so it is economically viable and sustainable, and perhaps also involve some sort of partnership with the government to make it broadly available.

With regard to earthquake, the AIR Worldwide study shows that a 500-year insured loss for a quake in B.C. is estimated to be approximately $20 billion and about $12 billion for Eastern Canada. “While these losses are significant, we’ve seen that the economic losses can be far higher and that the main reason is the low penetration rate of earthquake insurance,” Oehy said.

While about 60% of homeowners in Vancouver have earthquake coverage, this coverage drops dramatically in Montreal, where 96 out of 100 homes would be uninsured against an earthquake loss. Insurance penetration on the commercial side is much higher both in B.C. and Eastern Canada.

But what if insurance penetration – neglecting other underlying exposure growth factors – for residential business was similar to commercial business by 2035? For example, if Vancouver coverage went from 60% to 90%, “starting from today’s $20 billion total insured loss, this 500-year earthquake loss would increase by 25% over the 20-year period,” Oehy reported.

For Eastern Canada, starting from 4% today, to get to 70% by 2035 “that insurance penetration doubles every five years and this leads to the 500-year loss growing from $12 billion to $36 billion in 2035. This is three times bigger than today and significantly bigger than the British Columbia quake scenario.”

Acknowledging that the scenarios are very aggressive and hypothetical, Oehy said that he believes “the low insurance penetration clearly offers another opportunity for our industry.”

Oehy’s observations for increasing penetration are as follows:

• the industry must continue to raise public awareness towards the earthquake risk across Canada;

• consumer education on the product and coverage is very important;

• the product needs to be marketed effectively, maybe by using new technology or apps that combine awareness rising and product distribution; and

• the industry needs to continually improve its understanding of earthquake risk.

Oehy argued that the “what-if” scenarios demonstrate that such higher insurance penetration could be absorbed by the global reinsurance industry.&rdqu
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