Underinsurance of property risks: closing the gap. Thomas Holzheu Chief Economist Americas Swiss Re Economic Research & Consulting

Transcription

1 Underinsurance of property risks: closing the gap Thomas Holzheu Chief Economist Americas Swiss Re Economic Research & Consulting

2 Outline How big is the natural catastrophe protection gap? The global shortfall in property insurance Dealing with underinsurance Conclusions 2

3 How big is the natural catastrophe protection gap? 3

4 Below-average losses in 2015 no reason for complacency Global total economic and insured losses in USD billion year average Total losses Insured losses Source: Swiss Re sigma 1/2016

5 Global natural catastrophe losses totalled USD 1.8 trillion* over the last decade, with 70% uninsured 450 USD billion USD 1.3 trillion uninsured losses* USD billion insured losses* % USD 1.3 trillion 70% Insured losses Uninsured losses Uninsured losses last 10 years The global natural catastrophe property protection gap has risen steadily over the last 10 years 70% of the economic losses, or USD 1.3 trillion, were uninsured Source: Swiss Re sigma 5/2015 4

6 Natural catastrophe protection gap by region and peril, In the emerging markets, 80-98% of the losses are uninsured. Average uninsured portions have been around 55% for windstorms, 86% for floods, and 90% for earthquakes. Source: Swiss Re sigma 5/2015 6

7 Mw 7.8 earthquake in Nepal in Nepal 25 April 12 May 2015 Largest economic loss in victims Economic losses: USD 6 billion Insured losses: USD 160 mn homeless injured Worst disaster in Nepal since 1934 earthquake Severe damage to the country s cultural heritage

8 The catastrophe protection gap has widened steadily Much of the property protection gap is due to uninsured natural catastrophe risk, which has risen steadily over the past 40 years. Earthquakes, floods and windstorms are the main perils, particularly in areas of high population and property value concentration. In emerging markets, 80-98% of economic losses are uninsured. Expected losses are not as high in absolute terms, but can significantly deplete resources of less resilient economies. Modelling potential future events yields a global estimate of the expected uninsured losses from natural disasters of USD 189 bn in premium volume terms*. 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% 0.19% 0.17% 0.11% 0.07% 0.08% 0.05% 0.05% 0.02% Nat cat insured losses Uninsured losses Source: Swiss Re Economic Research & Consulting and Cat Perils. * Premium equivalents are calculated by adding a 25% expense load 8

9 The largest uninsured natural catastrophe exposures are in the US, Japan, and China Expected insured and uninsured losses from natural catastrophes USD bn insured uninsured USA Japan China Mexico Italy Taiwan Turkey Philippines Indonesia Germany Canada India Chile Netherlands Brazil United Kingdom France Australia Colombia Belgium Switzerland Portugal Austria Israel Hong Kong New Zealand South Africa Poland Czech Republic Denmark In absolute terms, the US, Japan and China account for most of the global protection gap (USD 102 billion in premium terms*) Insured EQ Insured flood Insured wind Uninsured EQ Uninsured flood Uninsured wind Source: Swiss Re Economic Research & Consulting and Cat Perils. * Premium equivalents are calculated by adding a 25% expense load 9

10 Taiwan Turkey Chile Japan Philippines New Zealand Mexico Italy Indonesia Israel Colombia USA Portugal Canada Switzerland Austria China Belgium India Australia South Africa Germany Taiwan Philippines Hong Kong Mexico USA United Kingdom Denmark Belgium Japan China Australia Netherlands France Austria Switzerland Germany India Many other economies are highly exposed as a % of GDP Although the US is highest in terms of absolute uninsured value exposed Smaller countries and emerging markets are likely to lose significant portions of GDP due to major catastrophes. Urbanization in emerging markets has contributed to higher property concentrations in risky areas. One-in-100 year earthquake loss scenarios (% of GDP) One-in-100 year storm loss scenarios (% of GDP) 14% 12% 10% 8% 6% 4% 2% 0% * * * * 6% 5% 4% 3% 2% 1% 0% * * * * Source: Swiss Re Economic Research & Consulting and Non-Life Risk Transformation. * indicates countries that rank among the top 10 in both categories 10

11 Earthquake risk has the largest protection gap in Latin America in relative terms Expected annual insured and uninsured earthquake losses in Latin America, USD bn. Mexico % Chile % Ecuador % Peru % uninsured as % of total risk Colombia Uruguay Brazil % 85% 90% Earthquake insured loss Earthquake uninsured loss 88% of total EQ losses in LatAm would go uninsured. Mexico hast the largest EQ risk exposure with USD 3.7 bn premium equivalent*. Ecuador and Chile have the highest expected losses from EQ in relation to GDP. Source: Swiss Re Economic Research & Consulting and Cat Perils. * Premium equivalents are calculated by adding a 25% expense load 11

12 The global shortfall in property insurance 12

13 Explosions in Tianjin, China 12 August 2015 Largest man-made loss in Asia Insured Losses USD bn

14 Benchmarking property underinsurance Insurance penetration vs. consumption per capita 1.2% 1.0% Property insurance penetration (premiums as a % of GDP) 0.8% 0.6% 0.4% 0.2% Consumption per capita in 1000 USD, logarithmic scale 0.0% 1,000 10, ,000 Source: Swiss Re Economic Research & Consulting 14

15 Benchmarking property underinsurance Insurance penetration vs. consumption per capita 1.2% 1.0% Property insurance penetration (premiums as a % of GDP) 0.8% 0.6% 0.4% 0.2% Consumption per capita in 1000 USD, logarithmic scale 0.0% 1,000 10, ,000 sample data Source: Swiss Re Economic Research & Consulting s-curve 15

16 Benchmarking property underinsurance Insurance penetration vs. consumption per capita 1.2% 1.0% Property insurance penetration (premiums as a % of GDP) 0.8% 0.6% 0.4% 0.2% Consumption per capita in 1000 USD, logarithmic scale 0.0% 1,000 10, ,000 sample data s-curve best-practice benchmark Source: Swiss Re Economic Research & Consulting 16

17 Benchmarking property underinsurance Insurance penetration vs. consumption per capita 1.2% 1.0% Property insurance penetration (premiums as a % of GDP) 0.8% 0.6% underinsurance 0.4% 0.2% Consumption per capita in 1000 USD, logarithmic scale 0.0% 1,000 10, ,000 sample data s-curve best-practice benchmark Source: Swiss Re Economic Research & Consulting 17

18 Benchmarking property underinsurance Demand lags in many emerging economies Demand for general property insurance (e.g. fire, business interruption, burglary, water damage) is strongly related to income and consumption. Many countries remain underinsured relative to income. Underinsurance can be estimated by the difference between bestpractice countries and those with lower insurance penetration rates (premiums as a % of GDP). Especially in high-growth markets, insurance demand is not keeping up with the pace of a rapidly growing middle class accumulating new wealth. A global benchmarking of insurance penetration across nations suggests a general underinsurance of USD 79 billion worldwide. 18

19 Dealing with underinsurance 19

20 Underinsurance explained 1. Entirely uninsured: People in this group do not buy any property insurance at all, either because they do not know about it or because they believe the cost of insurance outweighs the benefit. 2. Insured but with certain perils not covered: Insured clients in this category typically have a fire policy that excludes other natural perils. Policyholders may be unaware that certain risks are not covered, or comprehensive coverage may not be available in the market. 3. Insured but with restrictions: In this category, the insureds hold policies that cover natural perils, but the coverage is restrictive, perhaps due to limits on insurability. 4. Insured at a too-low valuation: Perils and terms may be appropriate, but the valuation parameters may be too low. Insurability: Certain risks such as some peak natural catastrophe, terrorism, cyber or contingent business interruption risk, can challenge the bounds of insurability. Buying behavior: Factors like perception of risk, insurance knowledge, affordability, reliance on government post-disaster relief, trust in insurers and ease of doing business can hinder adequate take up of cover, especially in new markets. Undervaluation: Valuing properties at less than replacement value can occur due to a lack of information or awareness. Source: Swiss Re sigma 5/2015

21 Difficult-to-insure risks contribute to underinsurance Top risks for which businesses are least prepared Terrorism Political/social upheaval Natural catastrophes Business interruption and supply chain Cyber risks Source: Allianz Risk Barometer % 7% 16% 18% 29% Risks that are hard to prepare for and sometimes not fully insurable Lacking historical data Difficult to measure or model Correlation / accumulation potential These difficult-to-insure risks include New scenarios that have not occurred previously Human behaviour, deliberate avoidance of prediction 21

22 The US has the most uninsured losses of any country The US is home to the peak natural disaster risks of Atlantic hurricanes and west coast earthquakes. US property values are growing faster rate than GDP and inflation. Total insured property values are estimated to be more than USD 90 trillion, with only USD 40 trillion insured. Consumer awareness and buying behavior is an important challenge: Surveys in New York after Hurricane Sandy in 2012 showed that only 54% of residents whose homes were less than a block away from a body of water had flood insurance. Earthquake insurance take-up in California is only 10%, lower than other high earthquake risk regions such as New Zealand and Japan. Undervaluation is a core reason for underinsurance: A large 2014 sample of commercial property in the US and Canada revealed that properties with limits below USD 20 million (representing 95% of the sample) were under-valued by an average 26%. Sources: Karen Clark & Co, CoreLogic, Wharton Risk Center, Swiss Re Economic Research & Consulting 22

23 Take-up rates for US P&C risks vary widely by type of coverage 100% 90% 87% 95% 99% 80% 70% 60% 50% 40% 40% 52% 62% 30% 20% 10% 10% 14% 0% CA Earthquake Flood Renters Cyber Terrorism Pvt. Passenger Auto Home Workers Comp Sources: III; CA Earthquake (WSJ, ); Flood and Renters (I.I.I. June 2015 Pulse Survey); Cyber (Advisen, 2015); Terrorism (Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014; data for 2013); Pvt. Passenger Auto (Insurance Research Council, Uninsured Motorists, 2014 Edition, data for 2012); Home and Workers Comp (I.I.I. estimates); Insurance Information Institute research. 23

24 How can we close the underinsurance gap? Source: Swiss Re sigma 5/

25 Dealing with underinsurance: Who needs to be involved to reduce underinsurance? Measures which promote risk mitigation or expand insurability Measures Objectives Agents Affordability of coverage Product design Access and distribution Insurance industry Government Public-private partnerships Product innovation Microinsurance Index-based insurance Product bundling New technologies and distribution innovation Government setting the rules for the insurance market Developing the takaful sector Mitigation, building standards, zoning Mandatory insurance programs Government- backed programs for risks that are not fully insurable Public sector insurance programs Source: Swiss Re sigma 5/

26 Conclusions 26

27 Conclusions The global shortfall in insurance cover for property risks is estimated at USD 267 billion per year. The challenge for the insurance industry is to focus on the needs of those who are totally or insufficiently insured. Government support in risk mitigation and insurance market governance is key for success. Further innovation in products, processes, and distribution are needed to reach previously uninsured consumers and risks. 27