Closing coverage gaps benefits (re)insurance markets around the globe
In many regions, protection gaps—the difference between economic loss and insured loss—exist for natural catastrophes, but also for man-made perils, such as terrorism and cyber. In this episode of Fo[RE]sight, Julian Enoizi, CEO of Guy Carpenter Europe and Chairman, Public Sector Risk Practice, and Dan Becker, CEO of Global Analytics and Advisory, discuss protection gaps around the world, how public-private partnerships can reduce those gaps, and how Guy Carpenter and March McLennan can help build an increasingly resilient future.
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Transcript
Eric Stenson
I'm Eric Stenson with Guy Carpenter. Welcome to this episode of Fo[RE]Sight, a Guy Carpenter podcast series bringing you unmatched leadership insights on trending challenges, as well as innovations and solutions delivered by experts in the reinsurance industry.
For today's episode, Public-Private Partnerships and the Mitigation of Coverage Gaps, I am pleased to be joined by Julian Enoizi, CEO of Guy Carpenter Europe and Chairman, Public Sector Risk Practice, and Dan Becker, CEO of Global Analytics and Advisory, will discuss protection gaps around the world, how public-private partnerships can help bridge those gaps, and how Guy Carpenter and March McLennan more broadly can help build an increasingly resilient future.
Thank you very much for being with us, gentlemen.
Dan Becker
Thanks for having me, Eric.
Julian Enoizi
Yeah, great to be here.
Eric Stenson
Dan, I’d like to start with you. Can you tell us about the protection that you're seeing in the market? Are these fairly consistent globally or are there regional variations?
Dan Becker
Yeah. Thanks for the question, Eric. So, maybe first a definition. So, when we talk about the protection gap, what we're referring to is the difference between economic loss and insured loss. And typically, that's in the context of natural catastrophes in the case of public private partnerships. And protection gaps can be a consequence of many different issues beyond just a lack of insurance for individuals.
Without an insurance ecosystem to invest in research, you end up in a situation where the risks are not as well understood or quantified, and resilience measures, things like building codes, which make risks easier to manage, are not as robust. But that said, protection gaps can emerge in developed markets where an insurance penetration is strong. A few examples—it can be difficult to secure full insurance protection if you live in an area with a dense concentration of exposure because insurers can't get diversification.
Another example would be there are situations where the insurance pricing is higher than consumers are willing to pay, so they end up self-insuring. And a well-known example of that would be flood in the United States. And perhaps the third example would be that insurers struggle to design products that cover systemic risks, things like financial crises or pandemics.
But, Julian, I guess you've seen these issues manifest in different ways around the world. How do you see it?
Julian Enoizi
Yeah, I'd probably just add one thing, Dan, to what you said, and that's the, you talked about availability. You talked affordability. I'd add awareness to that, because I think oftentimes the end insured, if you like, the consumer of the product, doesn't necessarily know that the particular catastrophe or particular event, let's say, is not covered by his insurance.
I think the other thing I'd add to what you said, and this probably comes more from my background, I suppose, but you talked about protection gap in nat cat, and I would endorse that's where the vast majority of the conversation is clearly around, you know, the climate debate, etc. But it does occur in man-made as well.
Terrorism, I think, is a specific one. But cyber would probably have similar attributes. And of course, nowadays there's a big dispute around coverage gaps or protection gaps in relation to war, you know, specifically with what's going on in parts of Europe and the Middle East. So, I think that's probably the that just a couple of additions I'd make to what you were talking about.
Eric Stenson
Thanks, Julian. When I think about protection gaps, everyone is dealing with these considerations. How is this a concern for the C-suite? I’d think resilience and climate issues would be a big concern for top leaders in the marketplace.
Julian Enoizi
Yeah, Eric, I think if I, you know, cast my mind back to when I was in the situation of running insurance companies and reinsurance companies, when you look at the day-to-day issues that the C-suite are dealing with or considering, obviously reinsurance protection, the price you pay for your reinsurance is extremely important. But there are a whole other range of issues that are going on in the world.
Geopolitical issues I talked already about, you know, war, in Europe, which of course is the first time we've seen that in over 70 years. And of course, climate change, which if you look at a survey of risk managers, always comes out as the No. 1 priority for insurance companies. And how you deal with these issues, I think, is an absolute primary concern to the C-suite, not only as to going back to what Dan was talking about, as to whether or not they are going to be able to buy insurance for these things, but whether or not they're also going to need to find ways to mitigate the losses that come out of them or adapt as to avoid the losses in the first place.
Eric Stenson
Absolutely. Now, I’m also curious, how do public-private partnerships help to close these gaps? Can you give us insights into current and future schemes around the world?
Julian Enoizi
Yeah, I'll take that one again, Eric. You can go around the world, and you will find that these kind of public-private partnerships have been set up by governments who have wanted to ensure that the risk doesn't sit on the taxpayer's balance sheet, but actually, as much of it as possible is pushed back into the private sector.
And so, you know, if you look in New Zealand, you've got the earthquake authority. In Australia, the existing terrorism pool has been expanded to cover cyclone. If you come to the Middle East and Africa, in South Africa, you have SASRIA (South Africa Special Risks Insurance Association), which was set up to cover more man-made events in terms of strikes, riot and civil commotion, but also terrorism.
But again, the South African government is looking at whether they can expand that, so that it covers natural events as well, things like drought, in that particular region. Morocco was a subject of an earthquake 2 years ago. There is a Moroccan earthquake fund. Turkey, a subject of an earthquake 18 months ago, has its own Turkish earthquake pool.
And if you look in Europe, governments are looking in Portugal for earthquake, in Italy for natural catastrophe. And then you go across the ocean to Latin America, and you got things like the Caribbean Risk Insurance Fund. So, these things have been set up to deal with a variety of natural and man-made issues to ensure, as I said, that the government isn't always the insurer of first resort, but actually is the insurer of last resort.
Dan Becker
Yeah. I think the only thing I'd add, Julian, is I think everyone appreciates the critical role that insurance plays in stimulating recovery after a loss and maintaining economic momentum. So, any situation you have where there's under-insurance, to your point, if the government is left holding the bill, that makes it very challenging to get back the sort of economic momentum that existed before the loss.
Some places just never recover. I mean, you can look at the challenges that Haiti has experienced after the earthquake many years ago, and it's very, very challenging when only a few percent of GDP is covered by insurance.
Julian Enoizi
Absolutely.
Eric Stenson
Those are really helpful examples. Guy Carpenter has been really active in fostering public private partnerships and innovative resilience initiatives in the US. Can you tell us about some of the work there, for example, on community-based catastrophe insurance?
Julian Enoizi
Absolutely. I think community-based catastrophe insurance, or CBCI for short, is something that we are extremely proud of. It's an innovative product that really looks at the fact that, as we said earlier, there is a massive affordability issue here as well, and often it is the most vulnerable communities that require insurance. And it's that often them that are unable to afford to actually purchase it.
CBCI really adapts to that situation, by that the insured, if you like, is the municipality. And the first one of these that we did was in the (Center for) New York City Neighborhoods. And we're now replicating this in many, many other parts of the United States. And my hope is that we'll do it globally over time. It covers 8,000 residents in this particular neighborhood of New York.
And what it does is in return for a reduced premium, which obviously would have been calculated by Dan and his crew, it actually marries this with a requirement to invest in risk mitigation. So, New York City invests in mitigation, in this case reducing flood. And in return for that, gets a lower-cost premium. And the advantage being that you then cover 8,000 people as a result.
Eric Stenson
Interesting. I was also curious about other solutions. How important are other innovations and alternative risk transfer tools such as parametric covers and insurance linked securities, in closing the protection gap?
Dan Becker
You mentioned parametrics, and it’s probably one of the most talked-about innovations, if we can call it that, in the insurance market. And it is that way because parametric solutions offer a number of unique features that make them attractive to public-private partnerships.
First, coverage is, is often based on the physical characteristics of a loss. And those characteristics are objectively measurable, which means immediately after that event happens, it becomes clear whether the coverage that was purchased is likely to respond. And, that ensures transparency, which brings comfort to people that aren't typically involved in the insurance marketplace. Perhaps another benefit is that parametric insurance accelerates the transfer of cash in the event of a loss.
And that's really critical where there's limited budget available for the community to get to recovery efforts quickly. Things like cleanup and rebuilding. And then, perhaps finally, I would say that the parametric solutions are highly customizable, which make them very good at protecting exposures that are difficult to quantify or makes them very good at optimizing recovery based on the unique situation of the community.
Julian Enoizi
Yeah, I just add, I think if you look at ILS, which was the other part of the question. Insurance linked securities have definitely been brought to bear in this arena. But I think one of the real challenges is one of the things that we try to work on at Marsh McLennan was to introduce the idea of something along the lines of a catastrophe resilience bond.
And so, you actually sought investors to cover these kind of risks, but actually, tried to find investors that were perhaps willing to take a lower coupon on their investment, so that the funds could be used during the period of the insurance coverage, typically 5 to 10 years, to invest in risk mitigation. Not the easiest thing to do, but I'm pretty convinced that that's the sort of direction of travel that we will go in, because we're not going to be able to outrun these events in terms of risk financing. Then we're going to have to find ways to adapt to them, and risk manage them, if I can put it that way.
Eric Stenson
Julian—really great insights. Just one more question: How do you think Guy Carpenter and Marsh McLennan more widely can help governments and the insurance industry to build a future that is more resilient to natural catastrophes and climate change?
Julian Enoizi
Well, I think, Eric, that Marsh McLennan is uniquely placed with its 4 market-leading businesses in terms of risk with Marsh and Guy Carpenter, and in terms of strategic consulting with Oliver Wyman and, of course, the people part of the business with Mercer. Marsh McLennan has already positioned itself as an advisor of choice, if you like, to governments around the world that are looking or grappling with these issues.
And so, we've been involved in the design and implementation of schemes in a variety of countries, and we are constantly involved in advising governments as to how to improve the schemes that are already in place, how to bring more capital from the private market to bear. You know, we believe strongly in risk mutualization, where, you know, the government is essentially the facilitator of a solution that requires government backing to get going, but over time, the government recedes as the private sector comes more to the fore.
And I could go on. I mean, there are examples in Europe, for example, EIOPA has put forward an idea for how it could create a risk pool that would essentially involve all 27 member states of the European Union. And there are a number of ideas that are going around like that, and which we are involved in advising various parties as to how best to design these things, so that you get the maximum amount of private-market involvement and the minimum amount of government involvement and taxpayer exposure.
Dan Becker
Yeah. I think the only thing I might add, Julian, is just back to the core capabilities of Marsh McLennan to bring the stakeholders together. I mean, there's a critical importance around education, and in many instances, the stakeholders involved are not experts in insurance. So, there's this need to help articulate the issues. Certainly, from a technical perspective, measuring the peril in question, but also translating what that means for risk to the community involved.
And when it comes to bringing the insurance industry in, you know, in some cases, even the insurance industry has an immature understanding of the peril, particularly when it's international or it's not hurricane or earthquake. I think the other thing is, you know, we're obviously involved in the pure design of the risk-transfer instrument, but it can be really challenging but equally important that there’s a clear understanding of what those risk-transfer solutions mean in terms of ROI. And if you look at some of the capabilities we have, we’re uniquely positioned to provide the transparency necessary for everyone involved, certainly to community stakeholders looking for protection, but also the capital that's being asked to fund support. You know, we're right in the middle of it.
Eric Stenson
Julian, Dan, thank you so much for a really interesting discussion and for sharing your insights with us today.
Dan Becker
Thanks for having me, Eric.
Julian Enoizi
Thank you.
Eric Stenson
It’s been really fascinating to see how public private partnerships contribute to closing coverage gaps, as well as ways Guy Carpenter and Marshall McLennan can help clients address these challenges. Anyone wanting to learn more, or who would like to engage with a Guy Carpenter expert directly, should visit guycarp.com and click on Explore Solutions.
Please look for the next episodes in our series as we address additional themes connected with the reinsurance environment from a C-suite perspective. And thank you to our audience for joining us on Fo[RE]sight, a Guy Carpenter podcast series.