The protection gap is growing. Here’s how insurers can close it

Pierre du Rostu, CEO of AXA Digital Commercial Platform, looks at the steadily widening protection gap – and how to start to close it.

EU crisis management commissioner Janez Lenarčič said in autumn that ‘devastating floods’ and Portugal’s ‘deadly wildfires’ would become ‘our new normal’ as the climate warms. That was before the disaster in Valencia took more than 200 lives. Lenarčič added that ‘Europe [was] the fastest-warming continent globally and [was] particularly vulnerable to extreme weather events.’ 

And that hasn’t changed. More households will be unable to insure their homes and the mounting losses from natural disasters could destabilise banks, Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority, said recently. She called it the ‘biggest risk facing society’. “It is a larger problem if people cannot get insurance for their houses, and they can’t build.”

They call this the protection gap. It’s the gulf between what’s covered and what’s needed. And it’s a problem. In the past 18 months, insurers have fled high-risk areas such as parts of California, leaving homeowners and businesses stranded. Others have hiked up their rates. But even low-risk areas aren’t as safe as they used to be. Wildfires have reached places not known for fires, such as Wales. The climate just doesn’t behave as it once did. Hurricanes are fiercer. Floods strike without warning. Wildfires no longer follow seasons. And natural disasters aren’t the only problem. Economic crises, cybercrime, political upheaval – all these overlap, intensifying the effects of the others.

The traditional insurance model – providing compensation after loss – is proving too expensive. But the traditional approach – using static models and historic data – is seen to be inadequate for predicting disaster. Prevention is better than cure, and resilience cheaper than ruin, so insurers, old or new, captive or not, must find a way to move from a response/compensation model to a prediction/prevention one. But if climate change is tearing through their calculations, which can’t account for the current, always-changing risk landscape, what should they do?

There is a solution: geospatial technology. Already, this is allowing both captive and non-captive insurers to track risks in real time. Satellite images and AI can map fire paths, monitor flood zones and reroute shipments away from danger. And these preventative measures work. The UN has shown that clearing flammable vegetation around homes reduces wildfire risk. Insurers can use data to work with homeowners, reinforcing buildings, removing fire hazards and deploying private firefighting teams. Flood mapping can help businesses shore up properties before waters rise. These steps really do save life and money.

Some insurers are still reluctant to make the changes they need to make. They say that despite the probable cost savings, the real, immediate outlay is too high. New technology, datasets and infrastructure doesn’t come cheap. But the cost of these tools is dwarfed by the price of carrying on as before. That cost will be shouldered not just by the insurance companies but by society. When insurers withdraw, and the protection gap widens, whole regions are put at risk. Economic decline, even collapse, is possible, as businesses struggle to get loans and governments spend public money on schemes vastly worse than those developed by insurance companies with decades of experience behind them and masses of in-house expertise.

Other insurers say that they’re being asked to become entirely different kinds of business. Focus less on compensation and more on prediction and prevention? Isn’t compensation for losses what insurers do? This is to take a view that’s much too narrow. The job of insurers is to manage risk and protect their clients from financial loss. Preventing those losses from happening in the first place is within the remit of insurers, and much better for all involved. This model helps to keep businesses open, homes standing and lives intact.

Where are we now? The captive insurance and wider insurance industry stands at a crossroads: evolve or shrink into irrelevance. The most forward-thinking insurers recognise that moving as quickly as possible, with the help of technology, to an approach that puts predicting and preventing above responding and compensating is the smart choice. Not only that – it’s the necessary choice. Those that don’t will fade. The world is changing. The question for insurers is whether they will change with it.

■ Pierre du Rostu (pictured)  has been CEO of the AXA Digital Commercial Platform since June 2022. He leads a team focused on providing new solutions for AXA's B2B clients. It aims  to help businesses navigate complex, interlocking risks using technology, moving beyond traditional insurance. Pierre began his career in consulting in 2011 and joined AXA in 2015, where he held senior roles in commercial P&C. He later became head of integration at AXA XL, then COO, international P&C, and global head of innovation and business architecture.

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