Thoughts fresh from WEF 2017: How to close the 100 Billion USD protection gap for natural hazards

 For Zurich Insurance, shared value as well as Corporate Responsibility means taking an active role to help society with the skills and the expertise that we have from working as a global insurer. To enhance prevention and to close the protection gap, you can look at it as follows, which are thoughts I put together attending a nice roundtable during the World Economic Forum (WEF) in Davos on shared value to close the protection gap. This also ties in nicely with this year's Global Risk Report 2017

Simply speaking, the protection gap is the difference between an upper and a lower curve of natural hazard losses over time. The upper curve illustrates the (increase of) total economic losses per annum. The lower curve signifies the part of the insured losses. In between, this protection gap from natural hazards amounts to USD 100 billion. Annually.

We can now try two things to reduce the gap: We can try to increase the lower curve, that is, to enhance the insured proportion of all the losses. We believe, however, that insurance per se, the financial transfer of risk, is not the front-end answer to the problem - a lot of things need to happen to make certain markets or areas insurable, and as such financial risk transfer is rather the tail-end part of the solution. We can also question whether it is financially sound to increase the curve of the insured losses - nobody wants these Nat Cat losses. Society primarily profits from avoided losses, not from insured losses, as the financial impact is just one of many aspects, disregarding human suffering and misery. We believe then, rather, that we need to work much harder on the reduction of the top curve - fewer total economic losses. And that's where the role of the insurance industry can be enhanced, going beyond the traditional risk-for-premium model. We have a lot of skills relating to risk identification, communication and management to bring to the table, and where we can help reduce overall economic losses - we should not focus just on the insured portion of losses.

We already do this in several ways in our Zurich Flood Resilience Program, an initial five year commitment of roughly USD 45 million from the Z Zurich Foundation in addition to contribution of time and expertise from the business. As part of the program, we have again made a strong case of the benefits of pre-event risk reduction and prevention. We know that there is a benefit-to-cost-ratio, on overage, of 5 to 1 when investing in prevention. In other words: Every 1 dollar invested in prevention avoids future losses of 5 dollars. However, we as society often don't act on the good information we have. Currently, only 13% of the money available in the disaster risk management sector goes into prevention, the bulk of 87% still goes into response and recovery, i.e. into activities after the losses have occurred. We at Zurich are striving to shift that needle with good evidence and setting best practices in prevention investments. Yet we need much more than what we can lift alone, and follow the Social Return on Investment approach and try to convince other donors to follow our example. The shared value approach thus functions as a two way principle: By understanding risks from natural hazards better, and by ensuring the need to reduce those risks and invest more in protection, we serve society with our skills and expertise from working as an insurer. On the other hand, this step is the necessary prerequisite to make currently uninsured or uninsurable risks even insurable.