Facing up to a new definition of protection gap

Uncertainty surrounding climate change, capital and collaboration gives reinsurers room to shine – but only if they can solve some of their own challenges first, says Matthew Britten, partner and risk assurance services leader at PwC Bermuda, who describes a new definition of protection gap.

In the context of growing risks, a push toward renewable energy sources and geopolitical turbulence, the risk-transfer industry faces both great challenges – and opportunities. But truly to maximise the latter, the industry must also face the reality of the true meaning of the phrase “protection gap”.

That is according to Matthew Britten, at PwC Bermuda. He spoke to Bermuda:Re+ILS and explained how the journey ahead demands patience, capital and plenty of partnership.

“If you think about the pace of climate and technological change, and you couple that with the really high level of uncertainty, whether economic or political, there’s a very strong argument to say this is a time in which reinsurers shine. Their value proposition is there to absorb losses and really help with stability,” Britten said.

“A number of companies are almost re-underwriting their entire book.”

And Britten is confident the underlying environment can offer the industry “a fantastic opportunity”. But he cautioned that the growth story had two distinct timelines. “With the pace of climate change and with the pace of technology change, there’s an enormous opportunity for growth. The required capital that’s going to be needed for the effects of climate is absolutely huge, and that will definitely drive premium growth in the future,” he said.

In the near term, however, macroeconomic forces might hold the industry back. “The impacts of tariffs and other factors may hamper economic growth, which in turn will put a dampener on the potential short-term growth for the reinsurance industry on the P&C side of the fence,” Britten added.

Equally, it must face some of the deeper challenges inherent in the industry now – which he terms a form of a protection gap.

Beyond the protection gap

The industry often talks about the protection gap in its literal meaning: the percentage of catastrophic losses not covered by insurance. But Britten urged a broader perspective. “The protection gap isn’t the only gap that’s out there and that should be cause for concern for reinsurers in the broader marketplace,” he stated.

For Britten, there are three others: “There’s also a resiliency gap, a talent gap and a funding gap.”

On resilience, Britten warned: “The risk mitigation measures we’ve had historically are just not going to support the changing environment and the risks that are emerging today and tomorrow.” He pointed to the need for stronger building standards and improved recovery measures after disasters. 

“A lot of work needs to be done thinking through how we build back better as a result of wildfires and floods, but also how we build in those risk measures that are going to help us tackle the increasing level of sophistication of cybercrime,” he explained.

Talent, he said, was an ongoing pressure point. “The re/insurance industry is struggling to attract and retain frontline talent - and has a rapidly ageing workforce. Obviously, the insurance industry’s future success will be dependent on talent. At the moment we’ve got fantastic talent, but it needs to continue.”

Regarding the funding gap, Britten returned to his earlier theme about capital demand. “There’s an enormous amount of capital needed to address expected exposure growth, but there’s also a need for funding into this new environment and investment in better resiliency standards for buildings, etc. How is that going to be funded? How are we going to help fund the transition?”

Britten sees addressing these four gaps: protection, resilience, talent and funding, as important as managing today’s underwriting and pricing. “Risks are really important, but thinking about those four gaps is equally important, as well as having reinsurers in the community think about how we support up each of those into the future.”

Risk frameworks revised

Asked how Bermuda-based reinsurers were adapting their risk management frameworks to evolving threats, Britten was clear: “Any reinsurer who is going to be successful in the long term has to constantly be thinking about their risk management framework and how it evolves.”

That means recognising the limits of the industry’s own data. “We’re a data-rich environment, but it’s historic data. How am I taking that data and thinking about how I’m going to apply it to the emerging, changing risk environment I am in?”

He explained how many firms were focusing their investments in predictable areas: “They are investing on the technology side of the fence. They are investing in talent, focusing on the development of deep analytical skills, modelling skills and scenario planning.”

Technology is also changing the mechanics of risk oversight. “On the tech side, we see a lot of people moving towards automating their risk monitoring aspects,” Britten noted.

Some reinsurers have taken a more structural approach. “Over the past few years, we’ve seen an increased level of focus and time spent thinking about portfolio construction,” Britten said. “A number of companies are almost re-underwriting their entire book, looking at their underlying book of business and asking themselves if this is in accordance with their risk appetite, their strategy and where they are looking to go on a forward basis.”

The partnership imperative

One notable shift in recent years has been a greater openness to collaboration, as Britten pointed out. “Reinsurers have, over the past few years, been expanding their thought process around partnerships.”

“A lot of companies have come to the conclusion that they know exactly what their expertise is and what they want to concentrate on, and they need to look to partners to help them in areas where they don’t have that level of expertise,” he added.

That could mean technological partners for AI capabilities, or MGAs to provide specialism in niche lines. “The partnership side of the fence is very broad ranging.

“Lots of reinsurers are much more open to partnering with outside parties,” Britten admitted, but he stressed the importance of governance to “make sure we’re getting our standards met by the partners we’re working with”.

Bermuda’s unique position

Britten is emphatic about Bermuda’s edge, saying: “It’s always good to be able to promote the strengths and uniqueness that Bermuda has to offer.”

The first of those strengths is collaboration. “The way the government, the regulator and business actually collaborate to come together to deliver products to the marketplace is very unique,” Britten explained.

The second is talent: “The breadth and depth of talent is phenomenal,” Britten continued. “The choice we have here in terms of brokers and companies has really added to that talent pool.”

Third is regulation, and Britten praised the island’s proactive stance. “Our regulator is very forward-thinking: they’ve created regulatory sandboxes where people can test out new products and services. They’re very quick to look at a business plan, try to get into it and understand it, and very quick to analyse large complex deals.”

All this, Britten summarised, makes Bermuda “a hub of innovation” in a market where risks are increasingly interconnected and exposures more complicated.

 ESG: a careful balancing act

While ESG has been on reinsurers’ agendas for years, Britten has seen a shift in how it is applied. “ESG really is just a framework and presents how companies will achieve a goal of sustainability. That’s always been a central goal of reinsurers,” he said.

But he stressed that the environmental transition cannot be instantaneous. “The transition that’s required in the environment is not something that can be solved by the flick of a switch. We have to recognise that companies, whether they are energy producers or companies utilising energy, need to fund the transition to alternative energy. 

“We can’t just turn off support for one part of the industry and move to another. We need to be able to support that transition, and that transition needs insurance and funding.”

The challenge, Britten explained, is incorporating ESG into underwriting and investment “with very careful consideration and balance, so that you are really helping move the transition forward”.

Strategic priorities and reinvention

Looking ahead, Britten said most reinsurers were acutely focused on “risk selection, pricing and capital management”, but stressed that they must also think more broadly about their strategic role in supporting growth, resilience and transition.

That includes participating in public-private partnerships to close gaps, and Britten is keen to see more collaboration. “How do I work in concert with others in the greater, broader community to solve some of these larger gaps around protection and around the resiliency gap?”

Severe weather, shifting customer demands and new risks are all pushing reinsurers toward what Britten called “business model reinvention”. He pointed to Bermuda’s expansion from property-only reinsurance into casualty and specialty lines as a case study in adaptation. “Customers want and need something different, and reinsurers have to evolve to that, including in the way they interact with customers, the distribution side and how capital is deployed.”

Capital alignment to risk will continue to evolve, Britten concluded, alongside new ways of delivering expertise. He sees one emerging theme being the convergence of financing and insurance. “One of the phrases we’re using a lot at the moment is ‘fund and insure’ to describe this part of the economy that’s driving the funding and insuring of businesses forward,” Britten said. 

“We need the stability of insurance, but we need an enormous amount of investment to fund transition. So this idea of how we fund and unsure is rising to the top of our vernacular.”

According to new PwC research, the redistribution of market share in financial services will be significant: it’s estimated that $604 billion could change hands in 2025 as a result of reinvention moves by companies in the insurance, banking and capital markets and asset and wealth management sectors.

Matthew Britten is a partner and risk assurance services leader at PwC Bermuda. He can be reached at mattew.britten@pwc.com.

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