More than cat and climate: the protection gap that cannot be ignored

While much of the discussion around the nature of the protection gap (the difference between insured and economic losses) relates to catastrophic events and the role of climate change, there is a much bigger picture and, potentially, a much larger opportunity for the industry when the definition is broadened to encompass other risks.

That is the view of Paul Scope, chairman, Ed Broking (Bermuda), commenting in the context of a panel discussion he participated in at the Bermuda Risk Summit in March. That session, called “Global Brokers Update”, brought together executives from a number of brokers including TigerRisk, Guy Carpenter, Acrisure Re, and Aon to discuss how collaboration in the industry might help close the climate protection gap.

While much of the discussion focused extensively on cat risks and climate change, Scope was keen to broaden the conversation. Speaking after the event, he told Bermuda:Re+ILS that there are two other areas where he sees a huge gap and, thus, huge potential: cyber risk and intellectual property (IP).

“I completely acknowledge that there is a vast protection gap in the cat space and climate change will only make that worse. But there are many other gaps in the system and I believe there needs to be more discussion around those,” Scope says.
“It is important this discussion happens because, while these gaps represent a big opportunity for the industry, there is also the risk we become increasingly irrelevant if we fail to help society solve these problems.”

He believes a large and rapidly growing protection gap exists in the cyber risk space and that the industry is struggling to price this risk correctly—and to put capacity to work in the right way on the correct risks.
“This remains a big opportunity for the industry and it is only going to grow and become more complex,” he says.

Bermuda to the rescue
Scope cites the fact that 90 percent of the value of the S&P 500 Companies is now made up of intangible assets: IP, data, and the associated innovation that is possible using technology.

Yet the risk transfer industry struggles to offer relevant solutions around these risks. Companies are clamouring for solutions that would help them cover the risks associated with 90 percent of the value of their businesses.
And capital is not the issue—there is plenty of that in the space. The fact is the industry does not like these risks. They are difficult to understand, to price, and to cover.

This means the industry continues to focus on the 10 percent it does understand, Scope says. “This is a big opportunity to create products that truly matter to companies,” he says.

Bermuda can become central to such innovation—as it has so often done in the past. Scope notes that a number of the new carriers formed in recent years are exploring writing some of these more challenging risks.
“The good thing about these new carriers is they have some very experienced and entrepreneurial senior executives,” he says.

“They have the mindset and willingness to solve difficult problems and tackle complex risks. That said, I am excited to see some of the new talent come and play a part in developing solutions to these problems. We need that different mindset, that different perspective. And Bermuda is the perfect place in which solutions can be created.”

There is a clear opportunity in finding ways to assess and cover such risks, but the issue extends to the insurance industry’s need to remain relevant in the context of the wider financial system.
“If the traditional market is unable to find solutions, companies will become used to self-insuring these risks or finding alternatives,” he says.

“Bermuda has a real opportunity to lead from the front on this. This market is very good at collaboration and working together to find answers. This is the perfect environment to solve problems, especially at a time when we have new entrants and capacity ready to be used.
“They are open to that sort of entrepreneurialism and we could see some exciting initiatives launched as a result.”

He emphasises that, unlike in previous hard markets, the newcomers are not simply writing as much plain vanilla property/casualty business as possible. Each has its own business plan and preference, and many carriers are ready to discuss ideas.
“They are open to conversations about writing new lines, be it IP business or covering transactional or legal risks in merger or acquisition deals,” Scope says.

He believes the biggest single opportunity is in finding ways to cover IP risk.
“There is already a huge gap in this space, which is growing. I firmly believe the Bermuda market can take a lead in finding innovative solutions to this that can offer a wider opportunity for the industry and ensure it remains relevant in a modern world,” he concludes.

Paul Scope is the chairman of Ed Broking (Bermuda). He can be contacted at: paul.scope@edbroking.com