Modern Insurance Magazine Issue 60

ARTICLE
3
Mind the
Protection Gap
Much like the rest of the world, the UK has a natural catastrophe protection gap, where total
economic losses exceed the total insured losses. Former Governor of the Bank of England, Mark
Carney, worried a few Lloyd’s syndicates when talking about the ‘tragedy on the horizon’ at Lloyds
in 2015. However, not much has materially changed since then in terms of closing the gap and
reducing risk exposure.
Why is this? Are policyholders willingly exposing themselves
to risk? Is there a lack of trust between the policyholder and
the insurer? Or, perhaps, with the cost of everything else
increasing, wallets are stretched too thin to cover?
Prospect theory - and more specifically, loss aversion - form
the basis of the behavioural economics of insurance. Tversky
and Kahneman found that psychologically, the pain of losing
is about twice as powerful as the pleasure of gaining, which
begs the question; why are people underinsuring their homes
to climate and catastrophe risk, given the increasing frequency,
duration and volatility of such events due to climate change? In
the UK, we are less susceptible to large impact events such as
tsunamis, earthquakes or wildfire. However, take a moment to
think of the winter storms and summer heatwave temperatures
that the UK faced back in 2022. Subsidence, escape of water
and general weather events account for 48% of home insurance
claims in the UK.
One could assume that the protection gap would be related to
inflation, the cost-of-living crisis and a lack of financial support.
However, in 2022, the average cost of home insurance was
actually the lowest it has been for 10 years. Everyone loves
a deal, but with a cheap home insurance policy you’ll often
find that the insurer has stripped more and more out of the
coverage to offer a reduced price, resulting in an insufficient
product that doesn’t provide the necessary cover. Insurance
doesn’t equal protection.
The blame for the protection gap typically sits with customers
for being underinsured. However, the protection gap is in fact
a by-product of the knowledge gap. I personally hate taking
my car into the garage due to my lack of knowledge on the
subject matter of car mechanics. A knowledge gap between
those buying and selling leads to trust issues - trust which is
then broken when the car still has a problem after paying for
the works, or when the claim is not approved after buying what
you thought was a great policy. Therefore, there is a shared
responsibility to educate consumers, simplify the process and
increase transparency on what they are actually buying. Only
then will trust be gained and retained.
Insurtech is leading the way - not just in our ability to predict
events, but also in our ability to assess damages after the
fact. Levering technology can also simplify the process for
consumers. Picture a climate protection product which offers a
cash pay-out based on an approved severity of risk. This creates
a climate risk management approach suitable for all parties, a
simplified and transparent process for buying insurance, and
an improved claims journey powered by technology - much
of which you will be able to find in Claim Technology’s open
insurtech marketplace. This can also lead to increased trust
between the insurer and the policyholder.
If insurers would start treating
policyholders with more care and
minimise their customer turnover,
building products that are fit for
purpose and don’t break as soon
as you want to use them, we really
could begin to reduce the home
insurance protection gap in the UK.
Ashley Preece,
Product Owner, Claim Technology
MODERN INSURANCE | 51