The industry can’t afford to ignore the widening protection gap – EY insurance global leader

“I wouldn’t call [some risks] uninsurable, but they are close to being uninsurable,” she said. “This then requires higher pricing, which leads to the question of affordability for the consumers. That obviously drives an increase in the protection gap.”

Santenac, who leads EY’s global team in helping insurers transform their business models through consulting and other finance services, spoke to Insurance Business about major themes for the insurance industry in the coming year.

“Economic and geopolitical uncertainty is putting pressure on insurers to be resilient and agile,” she said. “When you are navigating turbulence, you need to ensure you can be agile and make the right decisions. I think that is the focus for the coming months.”

Why is the protection gap widening?

Inflation sits at the top of the insurance industry’s list of current concerns. Insurers’ appetite for volatility will be lower as they try to manage costlier claims. Many insurers and reinsurers are pulling capacity in some areas or sectors due to immense losses, which is also contributing to the lack of protection.

Additionally, when the impacts of inflation are passed on to consumers as prices increase, affordability becomes a major concern. “People start to reconsider whether they need protection because they don’t have enough to just pay for necessities. That’s also contributing to the protection gap,” Santenac pointed out.

“The purpose of the insurance industry is to protect. From a reputational perspective, [the protection gap] could create some damage for the industry,” she continued. “At a certain point, governments could also jump in and force the industry to provide coverage [for certain exposures], but at a price that is not economically sustainable for the industry. So, I think if [carriers] don’t react, there is also the risk that they will be forced to do things that they don’t want to do.”

Innovation as the antidote

Carriers can adapt to both the economic uncertainty and complex and dynamic risk landscape by innovating. Unique challenges need unique solutions – and this is both a point of evolution and opportunity for the insurance industry.

“Instead of just the risk transfer, insurers are becoming more of an advisor,” Santemac told Insurance Business. “Helping to prevent the risk is a way to address the protection gap because then it makes the risk easier to insure, and more affordable for consumers.”

New products and services, using new underwriting models and via new distribution channels, can help address hard-to-cover exposures. For example, parametric insurance is an increasingly popular method of protecting individuals and insurers impacted by floods and other natural catastrophes.

“For an insurer, having one event cost you a set amount [using parameters] makes it much easier to model and much easier to price, therefore it’s also much easier to sell in larger scale,” Santemac said. “For clients, it’s a way to be protected – not entirely, but you know that if something happens, you’ll receive a certain amount of money. I think [parametric insurance] is something we should hope to see more developed from the industry.”

Disrupt or be disrupted

New ways of distributing insurance products, such as through partnerships or “embedded insurance,” will also challenge carriers to see their customers in a new light. Big tech companies like Amazon, which recently rattled the industry by launching its own insurance price comparison website in the UK, have the potential to create huge disruption, Santemac said.

“We see more and more that other industries are now selling insurance products embedded into their core products,” she noted. “That’s driving a need [for insurers] to segment your customers’ population to ensure you can offer them better products and better services.”

All things said, Santenac sees a bright future filled for insurance as it embraces more client-centric and data-centric models.

“The growth opportunities are there, it’s just a matter of figuring out how to capture them, how to be more innovative,” she said. “If the industry can understand and better segment clients, and [use data to] propose to them what they need, that will open more opportunities.”