This article was originally published by Asia Insurance Review
There are protection gaps across all risk types and solutions to address them should be considered holistically. Developing national strategies that are holistic, comprehensive and include suitable tools and capabilities is one of the ways countries can effectively address protection gaps.
Protection gap refers to the difference between total economic losses from risk events and what is available to support said losses or simply, the insured losses.
Within this broad definition, there are considerations of insurability and capacity and appetite within the insurance sector for providing coverage for risk events.
We look at protection gaps across all risk types and assessed that there are three categories of solutions to address protection gaps which should be considered holistically.
These are:
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Risk reduction via prevention,
mitigation and adaptation measures
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Increasing insurance penetration or inclusion
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Risk financing at the macro level
Risk events and increased urbanisation
Factors affecting frequency and severity (and hence economic losses) of risk events, as well as the insurance penetration levels are the main factors influencing protection gaps.
On the economic losses front, risks emanating from climate change have become much more visible in recent decades, with increased frequency and severity of Nat CAT such as cyclones, wildfires and floods leading to more frequent and higher economic losses.
Increased urbanisation, especially in coastal cities, exacerbates the impact of climate change. In 2024 and beyond, potential economic losses from Nat CAT are predicted to increase at an alarming pace.
This will also widen the Nat CAT protection gap.
Experts warn that this is a possible scenario if all sectors do not accelerate efforts to reduce emissions and mitigate climate change.
Increasing pressured on mortality, health and retirement protection gaps
Other than climate change and Nat CAT, inflationary pressures and demographic shifts due to aging societies in many Asian countries are contributing to increasing pressures on mortality, health and retirement protection gaps.
Improvements to healthcare systems have been observed to improve the health protection gaps but with the post-pandemic global economy, inflationary pressures, volatile financial markets which are expected to continue into 2024, the impact on individuals' and businesses' protection needs will continue to persist.
What has been done
We have seen initiatives around
risk reduction, increasing insurance penetration and risk financing, albeit typically in silos.
There have been efforts to improve insurance penetration especially for unserved or underserved customers. Financial literacy campaigns and leveraging on technology and bundling are some of the more commonly observed approaches.
Progress is, however, well below what is required to make a significant impact on the protection gap.
For risk financing, fiscal risk management and risk transfer at the sovereign level is most evident for countries with high Nat CAT exposure, with ex-ante financing increasingly part of sound government planning.Suggestions to develop national strategies
Policymakers are aware of the pressure arising from protection gaps and discussions to improve the situation are underway in many jurisdictions.
However, in all these jurisdictions, there are competing pressures for financing other initiatives which often leads to less investment in prevention and hence greater need for government resources when disasters occur.
To effectively address protection gaps, a suggestion is for each country to develop national strategies that are holistic, comprehensive and include suitable tools and capabilities, which can be shared with other jurisdictions.
Collaborative multi-stakeholder, multi-sectoral and holistic approaches to address protection gaps are also needed.
Action needs to be taken now because many of the major risks are evident and will only escalate in the coming years.
Unless a concerted effort is undertaken to deal with the many issues driving larger protection gaps, many people and businesses will suffer through lack of risk reduction, inadequate insurance arrangements and the inability of governments to apply resources where needed either on a preventative basis or on a recovery basis.
