SIRC 2018

You, like me, are probably sick to the back teeth of reading about the insurance gap.

When calculating insurance spend in basis points of GDP, it’s easy for your eyes to glaze over and to park this problem in the “too difficult to solve” box.

A recent report by Lloyd’s and the Centre for Economics and Business Research on the subject warrants a more detailed look, however, as among its findings is the fact that Japan is now considered to be underinsured, compared with five years ago.

While Japan’s insurance penetration rate between 2012 and 2017 has actually ticked up by 10 basis points to 2.3 percent, the country is now underinsured by $1.9bn, or 0.3 percent of gross domestic product (GDP), thanks to rising levels of forecast catastrophe risk.

This statistic is particularly stark given the level of natural disasters in Japan this year.

Typhoons Jebi look set to generate more than $10bn in insured losses, while floods in June and July were the deadliest to hit Japan since 1982, generating another $4bn in insured losses, according to AIR Worldwide.

And then there were the earthquakes – while the Hokkaido quake in September caused little insured damage, the Osaka quake on 18 June damaged hundreds of buildings and was reported to have caused $770mn in insured losses by September, according to the General Insurance Association of Japan.

As we know, when repair and rebuild costs aren’t picked up by the (re)insurance markets, the burden falls on governments, private businesses and individuals.

You don’t have to look back very far to see how painful this can be for the country’s economy.

In 2016, total economic losses from the Kumamoto earthquake came to $22bn – but only $5bn of that was picked up by commercial insurers, with the rest taken by the government or uninsured.

That’s tough to stomach for a country that has consistently seen its GDP shrink for years.

Between 2012 and 2017, Japan’s GDP has fallen from $6.2trn to $4.9trn. At $38,430 per capita last year, that still puts the company comfortably into the high income bracket, but marks a 20 percent decline.

The Lloyd’s report has a more worrying global outlook however. As it noted, in 2012 when it first conducted the underinsurance study with CEBR, the world was in recovery from the financial crisis.

Since then, most economies are at least on the road to recovery. But anyone assuming this would translate to a significant narrowing of the insurance gap would be mistaken – the gap has shrunk by just $5bn globally.

That’s at a time of rising frequency and severity in risk events. Last year was one of the costliest on record for natural disasters.

(Re)insurers can’t solve the problem alone – policymakers have their part to play.

But it’s imperative that carriers help governments to understand the impact of underinsurance, and work with them to develop useful products.

That might mean greater collaboration between carriers, more public-private initiatives, and an increase in adopting and underwriting emerging risks – all of which come with their own risks to companies’ P&Ls.

But doing nothing isn’t an option.

As Lloyd’s concludes, underinsurance helps no-one and harms pretty much everyone.

To read the SIRC 2018 special issue, please click here.