Emma Karhan, leader of the Public Private Enterprise (PPE) specialty practice of Aon’s Reinsurance Solutions business on how PPEs can learn from each other and move the costs of the protection gap to the private sector
As the world economy struggles to produce consistently strong growth, and with rising pressure on governments to increase public spending on welfare and services, there has never been a more important time for the (re)insurance industry to step forward and provide solutions to alleviate the costs of the insurance protection gap within the global economy.
Historically, PPEs have been effective and simple vehicles to provide this solution; however, with the changing nature of the industry (such as the supply and demand gap of insurance), as well as structural changes within the economies, the influence of the Internet of Things (IoT), and an increasing valuation based on non-tangible assets, PPEs need to adapt, change and look to provide new types of solutions for new areas of insurable risk to assist in moving the costs of the protection gap to the private sector.
There is also a huge potential for PPEs to learn from each other. Terrorism reinsurance pools have been setting an example of how PPEs should look to the future, adapting to maintain their effectiveness in a changing environment.
These pools are not only looking at the catastrophic risk, but also at new type of coverages that are evolving from a changing peril whilst the private sector ‘catches up’.
A series of terrorism losses over the past two decades have driven the coverages of terrorism pools, with all terrorism pools primarily covering property damage and resultant business interruption, consequently protecting economies against another World Trade Center-type event or property asset-driven shock loss.
However, as we have experienced in the past 17 years, the attacks or events from terrorism have become more frequent and of a smaller quantum.
They have also moved from targeting physical damage, to inflicting casualties, and characteristics of the types of impacted insurable risks have changed. Our economics are now supported by intangible assets rather than tangible assets.
These and other changes have demonstrated the need for pools to be flexible and adaptable to the changing environment in which they are operating. Terrorism pools recognised early in their evolution the most vulnerable parts of the economy to be protected. Now that the larger enterprises and the big corporates are protected, the pools are turning to the next most vulnerable sector of the economy – the small and medium sized enterprises – which often are impacted indirectly through denial of access and loss of attraction, but never suffer a physical loss.
This is where PPEs have the opportunity to play an important role – even those geared towards providing coverage against natural hazards.
PPEs need to look to the evolution of the terror pools and re-examine their own relationships and consequent effectiveness in covering the protection gaps in the areas in which they are involved.
One example is the increase in brush fires in both North America and Europe as a peril of higher frequency and severity as well as the low penetration or take-up rates that they have.
This is also a clear example of under-insurance, where coverage is available as provided by the private market and PPEs, but there is inertia in demand amongst insureds.
Should they be changing their models to improve penetration – implementing mechanisms so that certain coverages such as brush fire and earthquake become mandatory? Lines of business that tackle the new ‘insurable risks’ are a challenge for any insurance market. Coverage providers are working with very little data, and so pricing the risk adequately for long-term affordability becomes very difficult and risky, and could lead to a significant systemic loss – as we have seen in the past.
However, PPEs could also consider taking on the role of an ‘incubator’ for new coverages of new risks that are emerging from our intangible asset-based economies, passing the risk back to the private sector in its entirety once there is a more complete understanding of the exposures and the lines are established. Within this role there is also perhaps a different type of solution to help with the protection gap and de-risking the event.