John Neal, CEO of Lloyd’s of London
Collaborating to tackle the protection gap and create a sustainable future
Insurance is at the heart of global economies, and as these economies have grown and developed, so too has the role of insurance within them. Since 1688, Lloyd’s has been proud to be part of this development – sharing risk to build the foundations of cutting-edge industries; supporting societies to bounce back stronger from periods of hardship; and ultimately, creating a braver world.
However, insurance cover has never been universal, and the uptake of insurance remains inconsistent across geographies and sectors. This underinsurance creates a glaring ‘protection gap’, and the value of many of the world’s assets – personal, commercial, and cultural – are not covered for damage caused by unforeseen events.
Even before the pandemic, these protection gaps were an area of great concern across the insurance industry and beyond. We have seen first-hand the distress a lack of protection can lead to, especially when companies and societies need our support the most. As such, it is something Lloyd’s, as the world’s largest insurance and reinsurance market, has sought to demystify and play an active role in closing for many years, publishing our first report on protection gaps back in 2012, and collaborating with partners to build on those insights and find solutions.
The global health crisis has emboldened this conviction and highlighted the need to accelerate our efforts in this area. As we turn to recovery, the world is now asking – how can we best protect ourselves from future systemic risks, so we are better prepared for the future?
These approaches and initiatives are just the beginning of our commitment to work with, and beyond, the industry to close the protection gap and improve societies’ resilience to systemic risks. And there are many – from cyber, to food and infrastructure failures, to terrorism and war. But there is one systemic risk, that is front of mind for many of us: the climate crisis.
Like COVID-19, climate change is a risk multiplier, threatening to accelerate the development of risks of different kinds. As these risks multiply, so too do the gaps in protection. The physical risk of climate change has already brought an increased number of natural disasters to communities worldwide, from wildfires in California, to floods in Australia and heatwaves across Europe. The Lloyd’s marketplace is on the frontline of this challenge, supporting our customers and communities to protect against extreme weather events and recover quickly, if they do occur.
The other major risk brought on by climate change is transition risk – the disruption associated with a necessary but transformative redefinition of the global economy. Lloyd’s and the wider insurance industry are key here too – providing the expert guidance and support so industries can take risks and innovate, building in real time the sustainable and resilient economies of the future.
However, on both fronts, physical and transition, we see significant protection gaps today. In fact, Swiss Re’s Resilience Index 2020⁹ found that natural catastrophe resilience remains low, with 76% of global exposures unprotected, and with the global natural disaster protection gap widening to US$227 billion in 2019. Climate change is expected to put pressure on societal resilience and the low-carbon transition we see unfolding around the globe represents a phenomenal opportunity and responsibility for the insurance sector. Our inaugural Lloyd’s ESG Report¹⁰ outlines the first steps in our journey to being a part of realising this opportunity, across the insurance sector and for economies and societies worldwide. Lloyd’s is also proud to shortly be launching a climate action roadmap, which will articulate how Lloyd’s, and the insurance industry, can play a leading global role in accelerating the transition to a sustainable, resilient future through product and service innovation.
Opportunity
The insurance industry has a key role to play in answering that call, drawing on all our experience to identify and mitigate the world’s most challenging risks. Of course, we can’t do it alone, and as we’ve seen, the role of government is crucial here. But as an industry, we cannot miss this chance, either – we must work together to support the global recovery by using our risk expertise to close the protection gap, driving greater social and economic resilience into the future.
From our place at the centre of the insurance ecosystem, we know that fostering new conversations and collaborations across customers, insurance brokers, syndicates, companies, and governments are crucial to unlocking these challenges. That’s why earlier this year Lloyd’s launched Futureset, and with it a series of six Systemic Risk Masterclasses.
Futureset is a global platform with a mandate to consider the landscape of systemic risks globally, and explore the lessons learned from recent events, including the pandemic as well as the growing threat of climate change. Our aim is to build greater societal understanding of systemic risks, while prompting new collaborations to build protection and resilience.
Given the growing and interconnected risks that we face today, and in the future, our hope is to encourage more active participants.
As well as preparing for future systemic risks, our industry is playing an immediate and vital role in the global recovery through risk management, and of course claims assessment and payment.
In 2020, Lloyd’s was a proud partner in spearheading the insurance industry’s response to COVID-19, while also publishing open- source frameworks to share our approach.One of these in particular – “Black Swan Re” – offers a blueprint for how we can approach these challenges together in the future.
Systemic Risk – Pandemics
Systemic Risk - Climate Risks
At Lloyd’s, we know that protection gaps are a complex challenge to overcome. Reducing underinsurance will require ongoing collaboration, expertise and enthusiasm, with cross-industry partnerships playing a foundational role in accelerating progress.
Our purpose at Lloyd’s is sharing risk to create a braver world, and we will continue to use our unique position in society to bring together the insurance industry, governments, and communities to share risk, close protection gaps and create a sustainable future together.
Conclusion
Black Swan Re is a reinsurance framework for government and insurance industry partnership, which could enable industry pooled capital to provide reinsurance for the impacts of future black swan and systemic events, backed by a government guarantee should the pooled assets become exhausted. Since we published this, and two other frameworks that could provide customer protection against further waves of COVID-19, we have undertaken engagement with more than 25 governments around the world, to discuss their implementation, together with actively participating in several working groups across the globe. These conversations have been invaluable, but the work has only just begun.
Context
9 Swiss Re Institute (2020), Resilience Index 2020
10 Lloyd’s of London (2020), Environmental, Social and Governance Report 2020