Technology Is Reshaping Protection Gaps

As companies have become increasingly tied to the digital world, emerging risks have evolved to the point where traditional insurance may fall short of fully covering a loss.

For example, a data center’s policy might cover physical damage to buildings or equipment, but may not compensate enough—or at all—for losses tied to third-party vendor downtime, contractual obligations, power reliability, and other exposures.

This is known as a protection gap. For Michael Marks, associate vice president of emerging markets at Nationwide, they represent a signal the industry should heed. Marks acknowledges that the industry must be disciplined enough to know what is truly uninsurable, but “Sometimes a protection gap is not a signal that the risk cannot be covered. Sometimes it is a signal that our data, underwriting approach, structure, or partnerships need to evolve.”

Designing for the Gaps

This is because protection gaps typically don’t result from a failure in product design, according to Marks. Insurance policy forms may have been simply written for a different risk environment, or product distribution may lag because new exposures cannot be fully captured by older policy language, he says. Carriers, too, may lack confidence that their data can effectively characterize exposures, keeping risk appetite low. All this, for Marks, means that protection gaps are more properly seen as a lag in how quickly the industry is adapting to today’s risk environment.

The first step when redesigning coverages to fill protection gaps is to ask one question, Marks says: not “What product do we already have for this?” but “What is the customer trying to protect?” That could include property, revenue, uptime, performance, and/or operational continuity.

From there, the industry should break the exposure into pieces, considering what can be covered under traditional policies and what cannot, explains Marks. For risks that  fall outside traditional coverage, should limits and triggers be restructured? Does the situation require alternative forms of risk transfer like parametric insurance?

Marks highlights an example of what adjusting coverage and triggers might mean in business interruption coverage. “Historically, the model has been built around actual loss after a covered event,” he says. “But many businesses increasingly want protection that is earlier, faster, and more connected to measurable triggers or operational thresholds, whether that is revenue protection, system downtime, or other indicators of business disruption.”

Scaling Coverage Through Partnerships

Another critical industry tool to cover emerging and evolving risks head-on is partnerships, above all with MGAs, fronting carriers, and reinsurers. “MGAs can bring specialization, speed, and access to niche expertise. Fronting carriers can provide structure and regulatory access. Reinsurers can help with capital, aggregation insight, and confidence in scaling a new solution,” Marks says.

But those partnerships aren’t the only ones that matter in today’s technology-driven market, he adds. Deeper collaboration with the insured, data providers, technology vendors, and risk engineers is also essential—and often the only way to fully understand an exposure, Marks says. A practical example of this deep collaboration would be wildfire-exposed property, where the carrier works with modeling providers, inspection and risk-engineering partners, and wildfire defense services to understand the true exposure, verify mitigation, and build coverage around a more precise and defensible underwriting view.

Designing for protection gaps and developing partnerships will ultimately enable the industry to cover technology-driven emerging risk in a scalable way: better define the exposure, price for it in a disciplined way, structure coverage consistently, and operate it through a repeatable underwriting and claims model.

“At the end of the day, scale isn’t about simplicity, it’s about confidence,” Marks says. “When a risk becomes understandable, measurable, and repeatable, that’s when you can really scale the business.”