The Real Reason for the Protection Gap

For several years, AIR has written about, presented about, and created infographics around the problem of the “protection gap”—the difference between economic losses from extreme events and what is actually covered by insurance.¹ For the most part our discussions have focused on the “macro” level issues of global (re)insurers and governments, catastrophe models, and data. However, to learn more about the “micro” level issues that may be contributing to the protection gap, I recently attempted to buy flood insurance on my townhouse condo in a suburb of Boston. Like any other condo owner, there are two insurance policies at work here—a Condo Master Policy and my condo HO-6 policy—and in my case, two separate local insurance agencies.

I called up the agent on the master policy and asked whether I was covered for flood, knowing full well I wasn’t. He correctly answered no, but quickly countered, are you in a flood zone? I responded no, and he appeared to be unsure as to why anyone would want flood coverage unless their bank required it for their mortgage. The same scenario played out with the insurance agent on my HO-6; she was confused about why anyone would want coverage that they weren’t required to have by their mortgage lender. This time I wanted to push it a bit further, and explained that I had a friend who lived outside of a flood zone and had suffered a flood loss. That motivated her to initiate the process to sell me flood insurance.

She emailed me a form that looked photocopied, and asked me to fill it out, which I had to do by hand. Filling out forms by hand is one of the activities that I find most irritating in life, as my handwriting is absolutely illegible, even to me. Thankfully, the necessity of actually handwriting anything has declined dramatically in the past few years, but the technological changes that have made that possible have apparently not reached the independent insurance agency system in the U.S.

But I had bigger problems than my handwriting. Many of the questions that were being asked on this form were ones I didn’t know the answer to, even after working at AIR for 10 years. The questions I easily knew the answers to were occupancy, year built, whether I had a basement or not, and whether my house was elevated or not. Construction type was also an easy one for me, but I’m not sure that would always be the case for the typical customer.

But here are some of the questions that I and the average consumer would find challenging:

• Foundation: Slab or Pilings
• Type of Pilings: Wood, Concrete, Driven, or Poured
• Base Flood Elevation
• Lowest Floor Elevation
• Post-Firm or Pre-Firm Enclosure (luckily I don’t have an “Enclosure,” but if I did I would need to know this)

At AIR we’ve been talking about the protection gap and how to close it at a very macro level, but this exercise gave me a more practical feel for why the protection gap exists at all—including in developed countries. The ability to properly quantify flood risk does exist, from AIR and other modeling firms. And as we know all too well, there is currently enough capital to insure the risk. But those capabilities break down somewhere within the insurance value chain.

As my own anecdotal experience illustrates, there is a lack of willingness of the front-line insurance distribution system—in this case, insurance agents—to actually push the coverage. To the extent customers are aware of the risks and proactively ask their agents to buy flood or earthquake coverage (a rare situation to be sure), the process of getting this coverage is cumbersome and antiquated to say the least. On this point, there are a slew of venture-backed startups dedicated to making the insurance purchase “mobile first,” but to date these startups appear to be more focused on auto, renters, or lower value contents coverage, and have not yet made inroads into streamlining the process of purchasing flood or earthquake coverage.²

Closing the protection gap will require a concerted effort on the part of every player in the insurance value chain—from agents, to carriers, to reinsurers, and those of us in the modeling industry. I also believe it will require technology that identifies those who need coverage and places that coverage in a seamless way, as the status quo doesn’t appear to be doing the job. Getting the entire insurance value chain on the same page to make the necessary investments to close the protection gap is easier said than done of course, but that’s the real problem that needs to be solved if we are serious about closing it.