Closing the Protection Gap by Improving Mitigation and Adaption
Insurers can play a leading role in closing the protection gap by helping people plan to reduce the risk of disasters before they strike, and by providing financial help after, said Denis Duverne, chairman, Insurance Development Forum, and chairman of AXA, in an exclusive interview with Insider Engage.
Insider Engage recently had an exclusive interview with Duverne, in which he spoke about the role insurance can play - especially in countries with low insurance penetration. He referred to Swiss Re’s “S-curve” which measures the relationship between economic and insurance market development. By plotting a country’s economic wealth, measured by gross domestic product (GDP) per capita, against insurance market development, based on insurance penetration (the share of insurance premiums in GDP), the curve shows that spending on insurance rises faster than the level of overall growth in countries where GDP per capita is in the region of USD 5,000 to USD 35,000. In countries with lower and higher income levels, premium growth is about the same as or slightly higher than GDP growth.
Q: What can the industry do to close the protection gap?
Duverne: The insurance industry is on the right side of things when it comes to the issue of closing the protection gap. The challenge is that closing this gap is not something that the industry can resolve on its own. The way we measure insurance penetration usually is as a percentage of GDP. Swiss Re’s ‘S-curve’ shows that very poor countries have a very low penetration between zero and 1% of GDP. When countries accelerate their development — you have almost a vertical in the S — and then you reach a plateau at roughly 8% of GDP, which is where most developed countries are.
That's just a simple graphic. But the reality is very stark. It means when catastrophes hit, in a country like New Zealand, which is at the upper end of the S, you have roughly 60% of damages incurred being insured. When a catastrophe hits a country like Mozambique or Haiti, less than 10% of damage incurred is insured. The consequence is that, in the case of New Zealand, reconstruction happens in less than a year. Whereas on the other hand, in Haiti and Mozambique, it can take up to 10 years. The development implications are profound when one considers this.
That is why the focus on addressing the protection gap is important. The situation is even more urgent when one considers climate change and the latest IPCC report.
We have two main challenges with climate change: mitigation and adaptation. Most of the conversation, actions taken and financing mobilised have so far focused on mitigation. This is understandable but at the same time problematic. The reality is that we are not on track to limit the earth’s warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) but rather we are slipping away to a catastrophic 3 degree or warmer world. This is key because it exists against a backdrop where we are not investing enough in adaptation as is. Climate change is already a reality for millions of people across the world and with catastrophic consequences in the countries that are the most vulnerable and simultaneously also the least protected by insurance. This means that these countries and communities are, therefore, much more exposed to the consequences of climate change, with limited access to finance for investment in adaptation and recovery.
Insurance can play a meaningful role in this context — although not the only solution by any measure. It can offer a mechanism to help drive financial resilience by protecting people in two ways: risk analysis often undertaken by insurers at the time of underwriting policies that can be leveraged to guide preventative action. This is a contribution that the industry can make that is massively underutilised.
Fundamentally, insurers can help people to reduce the potential impact of catastrophes by providing financial compensation when a catastrophe hits. The developments in the industry with parametric insurance and other innovations can ensure that financial compensation can emerge immediately, and not several months, or years after such events occur. The timeliness of response is crucial in driving resilience and supporting faster recovery. To increase insurance penetration in less developed countries, there is, however, a need for some financial support from the public sector and also the broader development finance and donor governments as many of these communities are unable to finance premiums. This is where public private partnerships become essential and is central to the mandate and work of the Insurance Development Forum
Q: What were the big take-ways from COP26?
First, even though some progress has been made on the mitigation front, in terms of the country commitments, this progress is clearly insufficient. So, basically, before COP26, what we call officially the Nationally Determined Contributions (NDCs) were leading to 2.7 degrees global warming; after COP it is 2.4. So we are still well above the lower target of 2 degrees and the ideal target of 1.5 degrees that COP21 had indicated that we should aim for.
Secondly, the commitment of the private sector is more and more visible, both because the private sector is convinced that we have a role to play and also, there is an increasing interest from investors. More and more investors are motivated by ESG and the E of ESG. This is a reflection of a broader shift in the wider society. There were also a number of interesting announcements — the Glasgow Financial Alliance for Net Zero led by Mark Carney, representing a large part of the financial institutions of the world [to commit more than $130 trillion of private capital to transforming the economy for net zero.] There were also the commitments made on deforestation and beginning of commitments on methane. All positive.
The third takeaway, was an increased emphasis and attention to the issue of adaptation, although still not enough considering the scale of underinvestment as reflected in the IPCC report.
Q: Looking ahead to COP27, what do you hope to see there?
Progress on all fronts, I would say. I wish to see progress on the Nationally Determined Contributions because not enough progress was made from COP26. And more emphasis placed on adaptation, because when you look at the financing, or the funding to address the impact of these catastrophes, 95% of the financing is ex-post — after the event has occurred. There needs to be a shift towards greater investment in preparation and ex-ante financing. Such a shift would be remarkable and would change the story in a big way because it will force greater investment in prevention, more spend on risk analysis, more spend on risk financing solutions such as insurance. This is a much more efficient, effective and humane approach and especially in a context where we can expect climate change to drive more and more losses.
Q: Could you discuss any of your other major initiatives from last year?
Our major initiatives from last year have been in two areas. At the IDF summit that took place in June 2021, we invited David Malpass, President of the World Bank Group, and Kristalina Georgieva, Chair and Managing Director of the International Monetary Fund and they both made announcements that I really was hoping they would make regarding the fact that going forward and as part of their review of the financial situation of a country, they will not only look at the consequences of financial distress, but also the consequences of climate-related distress.
This is important because this is an area that is underdeveloped. There is a lot of focus on financial analysis on the risk of inflation, the risk of financial crisis, the risk of movements in interest rates, and so on. But climate risk analysis had not been integrated into the portfolio of analysis that the IMF and the World Bank were doing. This was missing. Such an approach was not aligned with encouraging efforts in developing countries to examine the potential impact of climate change and climate-related catastrophes on their infrastructure, their public finances, and so on. We have pushed in that direction, because there was an inconsistency in the global framework and one that I believe is now starting to be addressed.
The second major outcome of 2021, for me, was the announcement that we made of the partnership and signature of an agreement with the V20 — which as the name doesn't explain, groups 48 of the most vulnerable countries in the world — on the creation of a global public private partnership programme on risk and resilience analytics and which is to be known as the Global Risk Modelling Alliance.
The objective of this effort is to build risk analytics capability where it is needed the most. Through the use of insurance-based methodologies, tools and experience, countries will be able to develop greater local ownership of risk analysis, which is an essential foundation for mainstreaming climate and disaster risk finance and addressing the very deep financial protection gaps that exist in these countries.
The GRMA programme will offer three elements:
i. Open-source technology and standards, provided by industry and optimised for public-sector use cases;
ii. A public good fund to help countries fill model and data gaps (to be resourced by donors); and
Ipcciii. A technical assistance team of public and private sector practitioners to work with countries on applied projects (to be jointly resourced by donors and the insurance industry). The GRMA will apply open data standards throughout, enabling countries to build, share and further develop risk views across ministries, disaster risk management authorities and research institutions.
Recently, the German Ministry for Economic Cooperation and Development (the BMZ) announced that they would fund this project to the tune of 11 million euros and add to that 10 million of premium financing to support insurance programmes for those countries.
The third progress that we've made, is around the announcement that we made in 2019, at the UN Secretary General’s Climate Action Summit in September, of a Tripartite agreement between the IDF, the BMZ, and the United Nations Development Programme. We announced that we would deliver technical assistance and risk financing solutions to 20 countries vulnerable to climate change by 2025.
Since then we have made great progress. This includes, (i) initiation of a programme in Peru to insure 50,000 public schools, (ii) an innovative project in the city of Medellín in Colombia to develop a parametric flood and earthquake product, as well as an indemnity landslide protection, (iii) a project in Mexico to develop a sovereign parametric insurance solution for climate-vulnerable smallholder farmers against losses in the event of drought and uneven rainfall. This also includes a pipeline of projects in the works and some of which we expect will go live later this year
Q: What are your goals for this year?
Our goal for this year is to translate this Global Risk Modeling Alliance agreement into two concrete projects for four countries from the V20, and to move to 11 active projects by the end of the year as a result of our tripartite agreement.
Another goal is to help to continue to push broader global policy reform around the shift from the current focus on ex-post financing for disasters to greater investment in ex-ante instruments. With the German Government leading the G7 Presidency, there is an unprecedented opportunity to push for meaningful change that will have significant positive impacts for those who are at the frontline of the climate crisis.
Q: Could you say what countries you’ll be expanding to?
I can already share we are starting in Mexico and expect progress in Ghana and Nigeria. I cannot talk about the others because these are still being developed.