Arrowing protection gaps has become even more important due to the rise in recent years of four global mega trends that affect them either directly or indirectly, according to the Switzerland-based Global Federation of Insurance Associations (GFIA).
In a report titled “Global protection gaps and recommendations for bridging them”, GFIA says that the mega trends cause dynamic changes in the risk landscape, giving rise to new, rapidly increasing risks and reinforcing existing ones, thereby affecting global protection gaps.
The four mega trends are climate change, technological acceleration and the use of data; changing demographics leading to ageing populations, and disruptive developments in macroeconomics and politics.
Four protection gaps that are particularly relevant due to their size, global presence, impact on lives and livelihoods, and expected evolution, are:
Pension protection gap ($1tn annual gap)
Cyber protection gap ($0.9tn)
Health protection gap ($0.8tn)
Natural catastrophe protection gap ($0.1tn)
GFIA says that it has produced the report to promote greater understanding of the largest protection gaps faced by individuals, businesses and societies globally. The report examines the drivers of the most relevant protection gaps and provides an overview of the wide range of potential levers that could help reduce each of the gaps.
Pension protection gap — growth exacerbated by demographics
GFIA defines the pension protection gap as the difference between the savings needed to sustain a reasonable standard of living (65-70% income replacement) for the next generation of retirees and the currently projected inflows into the system. The cumulative pension gap is approximately $51tn today (excluding pay-as-you-go pension payments and disbursements). Converting this amount into an annuity over 40 years (ie, a typical work-life duration) to identify the annual protection gap, the global pension gap is estimated at $1tn annually.
The global share of people over 65 grew from 6.8% in 2000 to 9.3% in 2020, increasing the demand for pension disbursements. Given that pension needs are likely to continue to grow faster than the available funds, the gap will further increase, especially because decreasing investment returns are expected to hit pension schemes worldwide.
Cyber protection gap — risks are growing in frequency, severity and variety
Insurers currently only cover approximately $6bn in paid claims annually, with the USA being the largest cyber insurance market, accounting for roughly 70% of global cyber GWP. Although increased loss ratios in recent years have made insurers reconsider their cyber underwriting policies and risk appetite, the supply of cyber insurance in terms of GWP is growing and is expected to reach $13-25bn by 2025.
With the increase in the adoption of technology and digitization, annual economic losses from cyber incidents are estimated at over $0.9tn, having seen substantial growth in 2020 as a result of the COVID-19 pandemic. However, due to the small share of insured losses, the estimated protection gap remains at approximately $0.9tn.
Health protection gap — particularly prevalent in developing economies
The health protection gap can be estimated by looking at stressful out-of-pocket (OOP) health expenditure and estimated avoided costs. It is valued at $0.8tn to $4tn annually.
The lower end of this range only includes stressful OOP health expenditure, which represents a narrower definition of the gap and is particularly relevant in emerging markets. The higher end of the range also includes estimated avoided costs, which represent the largest share of the health protection gap at up to $3.4tn (although these costs are difficult to quantify as they are not officially reported).
Looking at the geographical distribution of the gap in more detail, there are significant differences: upper-middle-income countries constitute approximately 73% of the gap ($2.9tn), while low- and lower-middle-income countries constitute approximately 14% or $0.6tn. The rest of the gap is split between the USA, at approximately 7% ($0.3tn), and the EU, the UK, Canada and Australia (6%, $0.2tn).
The growth in the gap shows no sign of slowing, as the decrease in the share of OOP spending in most emerging markets does not seem to be fast enough to address the issue, especially because the populations and the middle classes in those countries continue to grow.
Nat CAT protection gap — accelerated by climate change
The current Nat CAT protection gap is estimated based on the economic losses from Nat CATs currently not covered by insurance. Nat CAT losses have increased by an average of 5% a year over the last 50 years. In absolute numbers, average annual Nat CAT losses increased from $126bn between 1990 and 1999 to $219bn between 2010 and 2020.
While the average share of insured losses increased between 1990 and 2000, the average share of insured losses was approximately 22%, compared with 33% between 2010 and 2020), this has not been sufficient to decrease the Nat CAT protection gap in absolute numbers. The current Nat CAT protection gap stands at roughly $139bn per annum.
The report contains GFIA’s recommendations to policymakers regarding the actions that can have the largest potential impact on global protection gaps. The levers can help to address the protection gaps in different ways, including preventing risks from materializing, improving access to insurance or using regulatory standards and frameworks.
Click here to access the report.