Tag Archives: protection gap

New-Generation Life Policies With Insurtech!

After the financial crisis in the European Economic Area (EEA), life insurance business was significantly influenced by volatile market conditions, low interest rates, pressures from regulatory bodies, changing customer demographics and investment patterns.

These undesired economic conditions caused a dramatic increase in the protection gap. The insurance protection gap or underinsurance shows us the difference between the amount of actual need for insurance coverage and the amount that is purchased. This significant gap reached $21 trillion in the U.S. 58% of American families would not be able to cover their expenses just a few months after a loved one from their families passed away. European Union countries are in a similar situation. Sadly, the coverage gap reached $17 trillion in the EEA. Moreover, inequality is widening faster than ever. Current social security systems are strained because people live longer lives and job security is not a given anymore.

When we look at other contributors to the protection gap, we see the negative perception about life insurance among customers. Life insurance is found to be very complicated and requires very bureaucratic processes to acquire, and policy premiums are not affordable. So, simplifying life insurance, especially for the new generation of insurance buyers, will be crucial for insurers’ future. The key of success is definitely insurtech!

See also: Where Will Unicorn of Insurtech Appear?  

When we examine the classic life cycle of a life insurance product, we see five main steps. These are:

  • New business and underwriting support
  • Agency and distribution management
  • Policy admin support
  • Claims management
  • Shared services

With insurtech, these steps will be converted to standardized, efficient and optimized processes. The necessity for new product introduction will be performed while maintaining consistency and maximum quality in customer services.

With insurtech, buying a life insurance policy will be converted to a digital customer experience, and this is a brand new business model. With insurtech, life insurers will:

  • create easy-to-understand and non-advisory life products,
  • have customer-centricity for creating life products,
  • have automated UW (underwriting) decision processes that enable instant decision,
  • reach target customers via different distribution channels,
  • use predictive analytics to transform business with measurable variables easily and
  • provide a high level end-customer satisfaction.

See also: Insurtech Can Help Fix Drop in Life Insurance 

Creating a straightforward and informative online journey for life customers, via insurtech, will be the unique solution for the penetration problem that life insurers face.

Real Reason for the Protection Gap

For several years, AIR has written about, presented about and created infographics around the problem of the “protection gap”—the difference between economic losses from extreme events and what is actually covered by insurance. For the most part, our discussions have focused on the macro-level issues of global (re)insurers and governments, catastrophe models and data. However, to learn more about the micro-level issues that may be contributing to the protection gap, I recently attempted to buy flood insurance on my townhouse condo in a suburb of Boston. As with any condo, there are two insurance policies at work here — a condo master policy and my condo HO-6 policy. In my case, there are two separate local insurance agencies.

I called the agent on the master policy and asked whether I was covered for flood, knowing full well that I wasn’t. He correctly answered no, but quickly countered, are you in a flood zone? I responded no, and he appeared to be unsure as to why anyone would want flood coverage unless their bank required it for their mortgage. The same scenario played out with the insurance agent on my HO-6; she was confused about why anyone would want coverage that they wasn’t required by their mortgage lender. This time, I pushed a bit and explained that I had a friend who lived outside of a flood zone and had suffered a flood loss. That motivated her to initiate the process to sell me flood insurance.

See also: The Myth of the Protection Gap  

She emailed me a form that looked photocopied and asked me to fill it out, which I had to do by hand. Filling out forms by hand is one of the activities that I find most irritating in life, as my handwriting is absolutely illegible, even to me. Thankfully, the necessity of actually handwriting anything has declined dramatically in the past few years, but the technological changes that have made that possible have apparently not reached the independent insurance agency system in the U.S.

But I had bigger problems than my handwriting. Many of the questions that were being asked on this form were ones I didn’t know the answer to, even after working at AIR for 10 years. The questions I easily knew the answers to were occupancy, year built, whether I had a basement and whether my house was elevated. Construction type was also an easy one for me, but I’m not sure that would always be the case for the typical customer.

Here are some of the questions that I and the average consumer would find challenging:

  • Foundation: slab or pilings
  • Type of pilings: wood, concrete, driven or poured
  • Base flood elevation
  • Lowest floor elevation
  • Post-firm or pre-firm enclosure (luckily, I don’t have an enclosure)

At AIR, we’ve been talking about the protection gap and how to close it at a very macro level, but this exercise gave me a more practical feel for why the protection gap exists at all—including in developed countries. The ability to properly quantify flood risk does exist, from AIR and other modeling firms. And as we know all too well, there is currently enough capital to insure the risk. But those capabilities break down somewhere within the insurance value chain.

As my own experience illustrates, there is a lack of willingness of the front-line insurance distribution system—in this case, insurance agents—to push the coverage. To the extent customers are aware of the risks and ask their agents to buy flood or earthquake coverage (a rare situation, to be sure), the process of getting this coverage is cumbersome and antiquated, to say the least. On this point, there are a slew of venture-backed startups dedicated to making the insurance purchase “mobile first,” but to date these startups appear to be more focused on auto, renters or lower-value contents coverage, and have not yet made inroads into streamlining the process of purchasing flood or earthquake coverage.

See also: Future of Flood Insurance  

Closing the protection gap will require a concerted effort on the part of every player in the insurance value chain—from agents, to carriers, to reinsurers and to those of us in the modeling industry. I also believe it will require technology that identifies those who need coverage and places that coverage in a seamless way, as the status quo doesn’t appear to be doing the job. Getting the entire insurance value chain on the same page to make the necessary investments to close the protection gap is easier said than done, of course, but that’s the real problem that needs to be solved if we are serious about closing it.

An Opportunity in Resilience Analytics?

In my post last month, I discussed why the insurtech revolution should be focusing more on addressing the protection gap, thereby growing the pool of insurable risks, rather than figuring out how best to eat the insurance incumbents’ lunch.

At a conference in February, Tom Bolt of Lloyd’s noted that an increase of 1% in insurance penetration can lead to a 13% drop in uninsured losses and a 22% drop in taxpayers’ share of the loss. The key to increasing penetration is lowering distribution costs to make products more affordable. That is where insurtech can come in. Many recent startups have business models looking to tackle the excessive intermediation costs that exist in the current insurance value chain.

Sadly, when a catastrophe strikes areas of low insurance penetration, those communities not only suffer from the difficulties of having to seek aid—which can take three-plus months to reach affected zones—but also face the prospect of a significant drag to economic growth. It is unsurprising, therefore, that governments in vulnerable countries are keen to improve their “resilience” and seek solutions to better prepare themselves for catastrophes by working with the likes of the World Bank, the UN and the recently established Insurance Development Forum (IDF). Interestingly, AIR Worldwide announced recently the Global Resilience Practice, which will be led by former U.S. presidential adviser Dr. Daniel Kaniewski.

See also: InsurTech Need Not Be a Zero-Sum Game  

As well as providing low-cost distribution models in new markets, a related opportunity I see for insurtech is working together with the insurance industry in the growing field of resilience analytics. As Robert Muir-Wood recently pointed out on RMS’ blog, the claims data gathered by insurers — which historically has been used for the pricing and managing of risk — have the potential to also be used to reduce the potential for damage before the event. Insurtech companies could work with government authorities to pool this claims data, leveraging it with other key data from external sources and then using the results to influence urban resilience strategies. There are inevitable doubts over the willingness of insurers to share their data, but agile and thoughtful startups are likely better placed to be able to find insights in a world of abundant unstructured data than the more technologically challenged incumbents.

The current size of the protection gap is a failure of the insurance industry, and any companies that can help address it will not only be first movers in new markets but will also be adding social value and much-needed resilience to vulnerable communities all over the world.

Rebuttal: Protection Gap Is Not a Myth

As with most articles I read at Insurance Thought Leadership, I enjoyed The Myth of the Protection Gap. I do agree with the author (Paul Carroll) that not everything that can produce a negative outcome or loss needs to be insured. In fact, we are now in an era where we can buy insurance for nearly any property we own with a swipe of an app on a smartphone. Assuming that these companies are not charities, this approach is counterproductive, simply because it forces users to waste time having to remember to insure the thousands of small dollar items we own, when we can just afford to replace them. So place me in the camp that says insurance is for instances where we could not otherwise reasonably expect to be made whole again.

But the protection gap itself is very real. I will use Paul’s hypothetical example to illustrate a counterpoint to his conclusion:

“To make the math simple, let’s pick a country at random and make up some numbers out of whole cloth. Let’s imagine we’re Gabon, and we, as a nation, incur $1.5 billion of losses a year, while only $500 million is covered by insurance. We’re told we have a protection gap of $1 billion. We should buy $1 billion of additional coverage.

It’ll only cost us $1.3 billion.

That’s because — again, in very rough numbers — the insurer has to tack on 20% on top of the losses to cover expenses and needs its 10% profit margin to keep shareholders happy.”

Let’s break this down: If the losses for Gabon are $1.5 billion per year, with $500 million covered, then how much insurance do they need to buy? The article is suggesting the answer would be an additional $1 billion.

But that is not the right answer. The right answer is that Gabon should not buy any insurance!

How is that possible? Well, if I know with certainty that my losses over time will be $1.5 billion, then instead of buying insurance I can set aside funds to pay those anticipated losses. To put it another way, if I were insuring an entity that will have $1.5 billion losses each year, then the premium I would charge MUST start at $1.5 billion (because I know for sure that those will be the losses ) and then tack on expenses for managing those claims, issuing paper and, of course, my profit margin.

Am I nitpicking? Yes, I am.

The hypothetical example likely meant that losses would average $1.5 billion per year and not BE $1.5 billion. But words matter, and, in this hypothetical example, the word “average” changes enough of the example to magically make the protection gap appear in full vengeance.


Well, averaging $1.5 billion per year in losses can mean lots of things. It could mean $1.5 billion each year, every year, OR it could mean a $30 billion loss happening exactly once in the next 20 years (or an infinite set of other combinations).


It is this uncertainty in the losses that makes insurance such a valuable tool for risk management. Insurance is that tool that allows Gabon to manage its cash flows in such a way that it can function day after day and not have to worry about finding $30 billion at a moment’s notice. Insurance is not about paying for the average annual losses, it is about paying for the extreme losses and avoiding the cash flow crunch associated with that. The smoothing out of volatile cash flows IS the peace of mind that is often marketed to consumers of insurance.

90% of California homeowners lack earthquake insurance. The take-up for flood coverage is similar. These perils have caused hundreds of billions of dollars in property loss, the bulk of which were uninsured. Tens of thousands of families became homeless. We’ve seen it In Louisiana after Katrina and in the tri-state area after Sandy, and we will see it again. The protection gap is not a myth, it is very real, and these perils will continue to cause hundreds of billions of dollars in damage. These are losses that homeowners and businesses cannot fund themselves. They require insurance to protect them from these catastrophes.

This fact alone provides a wonderful opportunity for our entire industry to grow by solving huge and emerging problems faced by societies. This is why we exist; this is our irreplaceable contribution to society.

The Myth of the Protection Gap

A friend and colleague, Chunka Mui, once said, “Marketing is when a company lies to its customers. Market research is when a company lies to itself.”

In the insurance industry, talk of the protection gap manages to combine both problems: It’s something of a lie to customers and is an even bigger lie to ourselves.

People routinely talk about the protection gap — the difference between losses incurred and the amount that are covered by insurance — as though the number shows how much more insurance people and organizations should be buying. We comfort ourselves with the size of that number, because we think it represents opportunity for us. We also, frankly, get a little condescending about the people and organizations that aren’t bright enough to buy our product to cover their losses.

But if you look at it from the customer standpoint, there isn’t a gap. We’re just kidding ourselves.

To make the math simple, let’s pick a country at random and make up some numbers out of whole cloth. Let’s imagine we’re Gabon, and we, as a nation, incur $1.5 billion of losses a year, while only $500 million is covered by insurance. We’re told we have a protection gap of $1 billion. We should buy $1 billion of additional coverage.

It’ll only cost us $1.3 billion.

That’s because — again, in very rough numbers — the insurer has to tack on 20% on top of the losses to cover expenses and needs its 10% profit margin to keep shareholders happy.

But why would Gabon decide to overpay by $300 million a year? The insurer’s employees and shareholders are surely nice people who could use the money, but shouldn’t Gabon take care of its citizens?

I understand about peace of mind and surely believe that insurance plays a crucial role in the world economy, but, from a certain perspective (one that many customers take), I’d be better off going to a casino and playing the slot machines rather than buy insurance. The casino might even throw in free drinks and a show.

Insurance needs some new math to replace the protection gap, and we need to stop acting as though it’s a real thing that a customer might care about.

The first step is to cut expenses radically — perhaps 50%. I use that number because a famous consultant/author with whom I have worked is going to argue in a book soon that every business needs to cut operating expenses by 50% within five years. I also see enough innovation happening around the edges in insurance that I think radical cost cuts are possible. For instance, at the Global Insurance Symposium in Des Moines last week, I met the founder of RiskGenius, whose artificial intelligence could automate the work of whole swaths of people at brokerages who review the constant stream of changes in policies.

But even that new math only shrinks the problem. Add half the previous expenses onto that $1 billion of insurance for Gabon, stir in the required profit, and you’re still asking the country to pay $1.2 billion to cover $1 billion of losses.

The real change can only happen when insurance gets out of its product mindset and shifts to a service mentality. Then someone could go to Gabon and say, “Our insurance company knows an awful lot about how losses occur. How about if we advise your government, your companies and your citizens and help you prevent as many as we can?”

Then, perhaps, you shrink those losses by a third — and keep some of that difference as profit. If you still take that whack at expenses, you could tell Gabon: “We’ll take responsibility for your $1.5 billion of losses (both the insured and the uninsured), and it’ll only cost you $1.25 billion. You’ll come out $250 million ahead, while we cover all our expenses and earn $100 million profit.”

That $250 million gain is the kind of gap a customer will believe in.