Last week we shared the findings of a recent study by Swiss Re on how the world’s property is seriously underinsured against the rising threat of both natural catastrophes and the typical risks such as fire and flood that all property owners face.
Today we’ll take a closer look at those findings.
The Swiss Re study estimates the global premium volume of the property market at $413 billion in 2014. Based on its natural catastrophe modeling data and the economic benchmarking of property markets, the study suggests a global underinsurance in property of $221 billion in terms of expected losses.
The study makes the subtle distinction between “protection gap” and “underinsurance,” terms which are often used interchangeably. The property protection gap is the uninsured portion of losses resulting from an event, meaning the difference between total economic and insured losses. Underinsurance may be defined as the difference between the amount of insurance that is economically beneficial—which may include some purposely chosen self-insurance—and the amount actually purchased.
“Underinsurance” can mean a lot of things. The Swiss Re study classifies it into several categories:
- Completely uninsured
- Insured for certain perils
- Insured with restrictive policy terms (deductibles/exclusions)
- Undervaluation of assets.
There are reasons for this, the study points out. The ideal level of risk transfer is typically not 100 percent. Risks like terrorism, cyber or contingent business interruption risk can challenge the bounds of insurability, and insurers typically avoid covering frequently occurring losses because it is not economically feasible. Additionally, many household and businesses choose to retain some risk rather than buying the maximum coverage available.
However, there are a number of explanations for why so many of the world’s property is underinsured. From the insured’s perspective, factors like perception of risk, insurance knowledge, affordability, trust (or lack thereof) in insurers and a lack of ease of doing business can hinder adequate coverage, especially in new markets.
Next time we’ll take a look at how insurers can help bridge the protection gap for global property coverage.