Talk of the protection gap tends to focus on developing nations, but a recent report from global reinsurance intermediary Aon Benfield found that almost 50 percent of the losses sustained from natural disasters in the United States remained unprotected.
It’s noteworthy considering the U.S. is one of the most insured countries in the world.
The protection gap is defined as the difference between economic and insured losses. It’s a hot topic in property insurance with the recent hurricanes and wildfires that have ravaged parts of the United States.
Global risk modeling company AIR Worldwide points to poor awareness of risk, government bailouts and capital allocation inefficiencies as a few of the reasons for the protection gap. That said, public and private entities can leverage the following strategies to ensure they’re completely covered in the event of a catastrophe.
Conduct a comprehensive property insurance appraisal: Collecting and maintaining a complete list of properties, with accurate up-to-date values, is a critical first step for any organization. Bringing a reputable appraisal firm on board helps. The failure to include every property or provide detailed data could leave an organization exposed. A meticulous appraisal firm can provide a comprehensive property report to help ensure you’re properly insured to value.
Understand the diverse insurance coverage options available: Insurance companies are always working to innovate their offerings, so keep up a dialogue with your broker, underwriter or insurance carrier is key. Carriers offer an assortment of private insurance packages covering some natural disasters – flooding, hurricanes, wildfires, etc. – that might not be included in your usual property allowance.
Consider risk pooling for additional protection: Around since the 1970s, property risk pools carry the resources individual entities might not be able to attain on their own (consulting, appraisal services, etc.). Additionally, buying into a pool with several other entities offers an opportunity to save money on costs associated with property insurance.
Leverage parametric insurance for added protection: According to Property Casualty 360, parametric insurance “pays the insured party a pre-determined amount upon one or more specified parameters being met. For natural catastrophes, the parameters might be wind speed, strength of a hurricane, rainfall amounts, magnitude of an earthquake or similar triggers for a specified geographic area.” Most often associated with natural disasters and developing countries, parametric insurance is a valid consideration for organizations working with property located in high risk areas.
Keep up with stricter building codes: With some natural disasters, governments are dispensing billions of dollars to rebuild cities. In the United States, Hurricanes Katrina and Sandy were prime examples. Erecting structures that perform well in natural catastrophes, as well as incorporating new technology, can reduce the cost on the governments after a natural disaster and limit the impact on your property portfolio.
Understand your exposure: Big data has resided in the insurance industry for the past decade, and it continues to grow. Brokerage firms and insurance carriers have invested in analytics to manage risk, and it’s enhanced their process when it comes to underwriting and claims processing. FM Global, a global insurance company specializing in loss prevention states that “decades of actual loss experience and hundreds of thousands of site visits are being applied to current conditions at property owners’ sites to make risk identification more robust than ever.”
In 2015, reinsurance company Swiss RE put the protection gap in perspective, reporting that “the global natural catastrophe property protection gap has risen steadily over the last 10 years, and 70 percent of the economic losses, or $1.3 trillion, were uninsured.”
Parametric insurance and stricter building codes have helped ease some of the burden, but, as natural disasters continue to persist, the insurance industry, along with the organizations that employ it, need to continue to evaluate the protection gap and implement innovative new practices to ensure property is properly insured.