Aon, the multinational insurance brokerage, recently reported an alarming rise in the protection gap for economic losses from 2021’s disasters. The protection gap rose from 30% in 2020 to nearly 60%. More alarming still, what are the implications for this year?
2022 has six months to go and has already seen Australia’s costliest flood ever. According to the ICA (Insurance Council of Australia) the insured losses from the east coast floods in March and April now stand at $4.3 billion. That amount alone is double the total of insured losses from 2021’s full year of six catastrophes.
“We probably expect a similar picture to previous years where flood has been the dominant peril in any loss year,” said Peter Cheesman (pictured above), head of APAC analytics - reinsurance solutions for Aon.
This suggests that 2022’s protection gap could be similar to 2021.
During 2021, Australia faced six catastrophe events: bushfire, two floods, a severe thunderstorm, a tropical cyclone and an earthquake.
“The range of perils producing losses in 2021 was wider than 2020. These perils such as bushfire, flood and cyclone have greater underinsurance associated with them when compared to perils such as hailstorms, which dominated the 2020 losses,” said Cheesman in Aon’s media release.
Cheesman said a change in the insurers’ pricing approach is driving this protection gap.
“Most insurers driven by consumer demand now adopt a risk-based pricing approach rather than the community-based pricing of the past,” he said. “Risk-based pricing means that those consumers with a high degree of peril risk will pay more than those with a lower exposure to any risk/peril.”
The Aon analytics expert said scalable solutions can help reduce the protection gap. He said parametric insurance products, particularly for flood and cyclone, had increased in popularity in Australia and globally in recent years.
“Parametric products pay out fast and rely on a parametric trigger (for example, a flood occurring) and are not contingent on a loss being incurred,” he said.
Cheesman said they are useful as a stop gap rather than an alternative to insurance.
“They are increasingly used by SMEs as a business continuity cover alongside a traditional indemnity policy as a stop gap while the indemnity cover pays out,” he said.
Late last year Karen Hardy, an independent broker from Tully in Far North Queensland, launched Australia’s first retail parametric cyclone insurance product for Northern Australia.
Hardy’s product, Redicova, is backed by the Lloyd’s Disaster Risk Facility (DRF).
“With Cyclone Larry in 2006 and Cyclone Yasi in 2011, I’ve seen that communities fail because they have no immediate disposable cash available to them post-disaster and that’s when they need it most,” said Hardy, Redicova’s managing director.
She said when a natural disaster hits a remote community it usually takes more than three months for a claim to be assessed and for repairs to get underway.
“So this is a band aid for that interim period so that they get their money straight away and they can basically stay in their community and pay their bills,” said Hardy.
Without knowing the details of Redicova specifically, Ramana James, IAG’s (Insurance Australia Group) executive general manager for safer communities was positive about parametric options.
“I would say that collectively across sectors we have to not be afraid of leaning into innovation and new solutions and what happens with that is that you get new emerging, commercial opportunities as well,” he said.
In early 2021, a parametric insurance policy written by the Caribbean Catastrophe Risk Insurance Facility (CCRIF) was triggered by the 7.2-magnitude quake in Haiti and delivered a record payment of $40 million.
Within a week of the disaster, CCRIF had paid $15 million of the claim to the Haiti government, shining a spotlight on how quickly and efficiently parametric insurance can support devastated communities.
Aon’s Asia-Pacific 2021 Weather, Climate, and Catastrophe Insight report evaluated the increasing frequency and severity of disruptive natural disasters and how their resulting economic losses are protected globally.
Focusing on Australia, the report noted that the $2.16 billion insured economic loss in 2021 was slightly above the long-term average of $1.84 billion (looking back to 1967). The report also looked at losses dating from 2010. In Australia, natural catastrophes averaged nearly $2.69 billion in annual insured losses from this date – a significant rise on the long-term figure.
2022’s insured losses are already nearly double that sum.
