Efforts to close the protection gap related to natural catastrophes have expanded and intensified over the past decade.
But the gap persists, and in many countries, it is growing.
Cyclone Idai is a recent example of what can happen to a single country with minimal insurance resources. In March 2019, Idai smashed into Mozambique, which has an insurance penetration rate of just 1.4%. It killed hundreds and devastated property and crops. Only a small percentage of the $2 billion in estimated economic losses was covered.
This is a global problem with no easy solutions. It exists in developed as well as developing economies. But the growing realization of the scope and scale of the problem and concerted efforts by public and private institutions to address it are reasons for optimism.
The potential to harness the power of technology and make use of advancements in data collection and data analytics to do more—and to do it faster, better and more efficiently—is tremendous. Technology is not a silver bullet, but it is perhaps the greatest game changer in the battle to reduce losses and provide risk financing for natural disasters.
The insurance industry must be more creative and resourceful in the use of technology and must think more imaginatively about the products and services that will best serve markets. Equally important, the laws and regulations that govern the insurance sector must keep pace with a rapidly evolving and technology-driven industry.
Three closely interrelated categories of technological advancements are contributing to a more detailed understanding of natural hazard and weather risks: (1) increasing availability of data (earth observation, the internet of things, crowdsourcing, and the like); (2) the increasing capacity to process that data (artificial intelligence, cloud computing, and machine learning); and (3) new tools for communicating risk data and mitigation advice.
These new technologies enable the insurance industry to create innovative, more-responsive services and products for all insureds. This includes advancements that can help governments understand natural hazard risks and design systems to protect their citizens and infrastructure. We now have the ability to observe and react not just to the aftermath of disaster but also to its portents, permitting better warning systems and interventions before drought leads to famine or a pressure system leads to a hurricane and coastal flooding. Using real-time data feeds to enhance disaster preparedness and disaster response services can save lives, reduce losses and lower insurance claims.
Moreover, through more precise data sources, it is possible to reduce the basis risk in parametric covers as well as accelerate the release and delivery of claims payments.
Innovation vs. Regulation
As technology and innovations transform the insurance sector, applicable laws and regulations must also evolve. Changes under way include how risks are underwritten, coverages are structured and distributed, and sources and uses of data are managed. These changes can all challenge current legal and regulatory requirements, including traditional insurance, reinsurance and intermediary regulations as well as data protection, where issues include heightened data security for information that may have national security implications, air and space regulations (consider drone and satellite operations), and telecommunications regulations.
Many cross-border or jurisdictional issues also can arise with insurance programs and supporting data and technology sources that may operate in multiple countries. Other laws and public policy decisions can either enable or curtail progress in closing the protection gap. Accordingly we need a new generation of laws and regulations to allow tech-enabled insurance to reach its potential.
The Insurance Development Forum is a public/private partnership led by the re/insurance industry and supported by several international organizations, including the United Nations and the World Bank. In a recent paper discussing the potential for technology to help close the protection gap, the IDF urges regulators, legislators and policymakers to take the following steps:
- Encourage the collection and sharing of critical data, such as sea level, population movement, building density, and drought. Gather data through earth observation via satellite or drones, deployment of weather stations, the internet of things and other resources.
- Support the development and sharing of risk models for emerging countries.
- Promote the use of risk models developed for risk financing in other fields such as emergency response planning and disaster response deployment.
- Pursue regional alliances to coordinate and harmonize efforts to use technology and insurance methodology to address the protection gap.
- Avoid duplication of regulation where sovereign programs or data-enhanced solutions straddle borders.
- Consider exempting sovereign insurance products from premium taxes, thereby increasing the funds available for risk financing.
- Update key laws and regulations to enable the use of technology driven insurance solutions.
These are just a few ways the resources and expertise of the insurance sector can be better mobilized to help close the protection gap in catastrophe-prone countries like Mozambique and elsewhere. This is in addition to the use of the industry’s capital strength to finance disaster risks, its deep knowledge of risk and risk mitigation measures to avoid loss and save lives, and its established ability to assist in disaster response. Insurers are ready, willing and able to step up. Most of the world lacks and desperately needs the benefits only the insurance sector can provide—even more so with the latest technological advancements and the right regulations.
Bill Marcoux is chair of the Insurance Development Forum’s Working Group on Law, Regulation and Resilience Policies.