Protection Gaps series - Episode 1: The role of innovation in closing protection gaps

Protection gaps are the divide between economic losses and the insured coverage available to mitigate them. Climate related protection gaps are widening. There's an increase in frequency and severity of extreme weather events and natural disasters. As a result, more people are vulnerable to the financial consequences.

Listen to our first episode featuring Paolo Mantero, Group Chief Strategy Officer, and Dirk De Nil, Global Head of Zurich Resilience Solutions, in conversation with Vincent Landon about how technological innovations can help insurers close protection gaps.

Related links
Blue Marble: https://bluemarblemicro.com/

XFarm: https://xfarm.ag/en

Zurich Innovation Championship: https://www.zurich.com/campaigns/zic

Zurich’s Climate Transition Plan: https://www.zurich.com/sustainability/strategy-and-governance/climate-transition-plan

Economist Impact Report: https://www.zurich.com/knowledge/topics/climate-change/resilience-from-the-ground-up

Google DeepMind: https://deepmind.google/discover/blog/graphcast-ai-model-for-faster-and-more-accurate-global-weather-forecasting/

Transcript

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Welcome to our podcast, where we explore the transformative role of innovation in closing protection gaps within society. Today we're joined by Zurich Group's Chief Strategy officer, Paolo Mantero and global head of Zurich Resilience Solutions, Dirk De Nil. They'll share their insights on the evolving landscape of insurance in the face of climate change and how technological advancements are reshaping the industry. Protection gaps are the divide between economic losses and the insured coverage available to mitigate them. Climate related protection gaps are widening. There's an increase in frequency and severity of extreme weather events and natural disasters. As a result, more people are vulnerable to the financial consequences. Paolo, can you give us an idea of the scale of the problem? Thank you. The scale is big. It's $3 trillion we're talking about, is the size of a G7 economy. That's the size of the global protection gap overall. And the other interesting and sad fact at the same time is that this gap is becoming bigger and bigger every year is going faster than the economy. So, we have a role to play as an insurance company. We protect people. We protect them from risk. And we have these big growing gaps in front of us. So, we have a role, and we have a role in terms of understand the risk better, which helps covering more. We have a role in thinking about new solutions to cover risks, a new way of doing it. With the new technologies and innovative products. And surely, we have a bigger role in help preventing people from risk to materialize and happen. Can you tell us a bit more about that, Dirk? There's immediately two things that come to our mind there. It's transition and it's adaptation. And as an insurance company, yes, we need to play a role with respect to transition, we definitely need to support the industry moving ahead with these new technologies. But I think, as Paolo already was saying as well, right, it's much more in the adaptation side where we need to play as a company. And so that's where we need to work with the industry, that's where we need to work with public entities on really how to build resilience against what's happening out there with the climate right now. Public private partnerships have emerged as a pivotal mechanism for bridging protection gaps. They play to the strengths of both sectors and hopefully lead to comprehensive strategies that cover different areas of risk. What are the opportunities and challenges for public private partnerships in narrowing climate related protection gaps? Glad you asked the questions because the opportunities are huge. If you look at the size of the protection gap, that's comparable to the size of the insurance industry. So, it doesn't take much to understand industry- insurance industry - alone cannot cover the gap by itself. So, I think there is an opportunity to collaborate with states, but also the financial markets to provide solutions that are joint. And when it comes to state and the regulators, that's very important on multiple aspects. You see, in certain places, when the regulator doesn't act in a way which goes along with the risk, the protection gap becomes huge. That's very interesting. Is there more on that? Take what is happening in California nowadays. So, the risk of fire has doubled over the last five years. But the regulator said, well, insurance prices have to stay still. So, the result is that 90% of the insurance companies have basically fled the market and 50% of the households in California as a consequence are uninsured. It's not the, you know, the end results that we want. Now, in that case, the regulator is taking action. And has understood that and now prices are adapting. But of course, it's not just a matter of price. It's also a matter of having joint solution where the public takes its responsibility of things is what we have in Switzerland with the 'Elementarschadenpool', right? The states and private sector come together with one solution for things like catastrophes, but also pandemics. And of course, we've talked about the role of government as a provider of capital. But of course, on the resilience front, there's a huge amount that can be done. Dirk. Yes, absolutely so, but I mean, I think what Paolo was saying rightfully as well, right? So, it's we have to play a role, resilience, obviously, governments have to play a role and we have to play a role, together, right? But let me before I talk about ourselves or our public private partnerships, maybe say a couple of words also about governments in specific, because I do believe actually and that's at again, remember, right offer side, demand side. It's more at the offer side because governments really, they have the power that can really stimulate insurance penetration. I mean, think about mandatory schemes, right? That can really oblige companies to buy certain types of insurance. Now, if they do it, they should do it in a very prudent manner, obviously, because as a sector, we can only absorb as much as we can, right? And so, it's always good that the government steps in as well as the ultimate provider of capital as well, or kind of an excess insurer if you want. France is a perfect example. So, for every property policy, you contribute a bit of premium in a pool. And when a climate event happens, it's the pool that pays, right? So, governments at the offer side can definitely play a role as well. I just wanted to say that. Now as to public private partnerships, right, where we work together with them, which is very important, I really believe we should be focusing on resilience, building resilience. And that, of course, is really the heart of the matter there. Can you just tell us a bit more? And so in that respect, I'm very happy and very pleased that I can say that we as a company, we work with 15 cities globally, in nine countries where we really try to work together with cities really on water scarcity and heat. In Madrid, more specific, we work with the city council really on, again, the impacts of heat, but for schoolchildren in specific, right? And not a surprise, I mean, I can answer the question, what do you think are the recommendations? But it's all about water again, how can you provide water to these children? How can you have more green around the schools? And then obviously. How do you, what's the construction of a building, right? What materials you use, how do you position the building, etc., etc.. So, many things are happening in that respect. We've talked about cities. It's part of the theme. It's one of the strands. We're also looking at other approaches as well, aren't we? Correct. Yeah. And so, hey, one thing is important, right? It's we need to continue learning elsewhere around cities in particular. And I think that's why we took the decision to really sponsor a global survey with The Economist under the title of 'building climate resilience'. And so, we really interviewed academic people. We are interviewing people of all of the city councils, the public experts. So, it's really good and it will really provide very insightful ideas about what's happening around climate change in cities, actually. Both at the heart of all this are innovative products and solutions, you know, innovative solutions offer new ways to address protection gaps and insurers are increasingly looking to new technology to improve insurability, foster prevention and build resilience within communities. Dirk, I'm going to go to you first now, because how is Zurich using technology to mitigate and adapt to climate change? What are some of the key initiatives in this area? What's the impact on new insurance models? As an insurance company, we have access to a lot of data. I mean, as we own the right risks, as we do risk engineering work with the risks. We really know about where is the building located. So, we have location data. We also have exposure data. What is the value of a building? Again, what material has been used to construct a building? What are the building standards that have been applied during the construction, etc.? So, if we take all these data together and then overlay that with climate models, we can definitely define what the critical exposure for a company is with respect to wind, with respect to a flood, with respect to whatever peril you can come up with, right? And then we can send people on the ground to really work with companies, to work with public entities to really build resilience. So, computational power is going up, artificial intelligence is there, and we can now really access, and data mine or analyze much bigger amounts of data and so, be more precise in the insights we generate because of that. And then also become much more precise in the resilience work that you need to be doing to protect against climate work. This is part of a wider picture, isn't it, of innovation within Zurich. And I think we live in a world of specialization, right? And an insurance company can be specialized. And we are specializing in risk. But to face big problems like the one of climate change or the one of building resilience, you need more than just being specialized in risk. And so, we need to access other capabilities. Here, partnership with companies that are specialized are very important. Can you tell me a bit more about that? So, just to make you an example, right? We know that one of the biggest risks that we face when we share property, is substance. So, construction basically falling in the ground because the ground falls down. And we know there's actually a map where this happens. We have models to understand how it evolves. But you can reach these models with the satellite imagery and understand from, you know, pictures of the satellite how this is evolving. Now, we're never going to be owning a satellite or image processing technique to understand that. And this is where a partnership is very vital because there are companies that have built this for multiple purposes. But we take the output of their work to make it something that is related to risk and resilience, which is our DNA. So, I think collaboration is important. What we try to do with Zurich Innovation Championship every year we ask out in the market companies to help us on certain things like that. And, you know, we have selected more than 50 partnerships over the last that five years with companies that are very specialized in one piece of the chain. And in one element that can help us insuring things better or improving resilience better. So, that's an approach to find collaborations that are long lasting, and can add, what we are not specialized at. And of course, it's not just the Zurich Innovation Championship, it's a part that is, again, part of a much wider picture here. Absolutely. The picture is very wide. And for instance, our climate transition plan as a resilience, as a cornerstone of what we can do as an insurance company to contribute to a better planet, a better word. Preventing risk is a key role and in climate is prevention is a determinant factor between success in bringing the world down to a zero-carbon world and a world where temperature keeps increasing and creating more issues for us. And Dirk do you have sort of other examples, actually? Yeah. Practical? Absolutely. So, I mean, it's not all about data, right? And that's the most spectacular and we like to talk about. I mean, absolutely, partnerships, it's extremely important as well. Now, I think there are also more simple things you can do to help close the gap. And I would be thinking here about things like parametric insurance, micro-insurance. And so, for parametric insurance, let me maybe I mean, it's really you link your pay-outs to pre-defined triggers. Could be amount of rainfall. And so, in Italy, we work with a company called xFarm Technologies, and we came up with an insurance solution that protects farmers against unexpected irrigation expenses if there is not enough rainfall, right? So, it's a very simple example, I think, but very efficient. And then I mean, micro-insurance, obviously you really make climate protection insurance accessible, available for people with low income, for small companies and that in particular in emerging markets. We at Zurich we work together with a company called Blue Marble, and they do things like they provide crop insurance in Zimbabwe. I think in the Caribbean they provide cat cover. So, and that's really on a smaller scale. And people you don't hear so much about it, but it's also very relevant, I think, to mention it. And of course, moving on with I mean, we talked about innovation and prevention. I mean, it's key to any strategy aimed at narrowing protection gaps. How are insurers integrating prevention into their strategies? And what impact have these initiatives had on community resilience? Some examples here, Dirk? The unit I am leading, Zurich Resilience Solutions was established in 2020. And it's really where we work with companies, but also with public entities on identifying risk, assessing risk, and then really work with these companies and public entities to build resilience, to reduce the risks. I think prevention is important because insurance without prevention poses a moral hazard. So, if you're insured, you really work and invest. Do you invest on prevention? Do you invest on making the losses that would come from any event lower? If you are insured, you don't care. And so, if this happens, what happens is the protection gap widens. Because there would be more and more expensive events and insurance costs will rise and people will not have access to insurance anymore. So, to make it socially viable, insurance has to come with prevention. That's why we believe that prevention is an important part of what we do because you know the capital side of insurance and the risk side of insurance have to come hand-in-hand. Looking ahead, what are the opportunities and challenges you foresee in that sort of intersection of climate protection and innovation in the insurance industry? Again, also here huge opportunities, I think about weather forecasting. Over the last 30 years we were able to improve the way we could forecast climate events like tornadoes and with an accuracy that went for from three days, from one day to three days ahead of the event. So, we and think about how many things we can do in two days just helping people getting out, protecting buildings, protecting assets to make sure that we minimize the impact of those events. It took 30 years to gain two days. Okay. Today, two very important days. Now, over the last few months, GraphCast, which is a system based on Google DeepMind, through AI, was able to reach the same level of precision in forecasting that all these models developed in such a long period, right? So, that just gives you a sense of what is the promise for the future. Now, of course, there are limitations, there are shortfalls. Models needs to be trained better at, provide better outcome. But, you know, the promise is there, and I think it's clear. I think the challenge here is to make sure that we don't expect more for these new technologies that the new technologies can deliver with a level of maturity. And of course, how we interpret and analyze that data as well, which is clearly I mean, you must be overwhelmed by data, I'd imagine. I'm very proud as the head of Zurich Resilience Solutions to talk about it, but also to say that we work with data and for our customers the same data as we use as an insurance company, as Zurich, a big insurance company, to really decide on our reinsurance management, to decide on our capital management, to decide for ourselves, really. And so that's a very important thing, I think. Thank you, Dirk, and thank you, Paolo, and thank you for joining us today as we uncover the innovative solutions and collaborative efforts needed to secure a more resilient future for all. We hope this discussion has been enlightening and we look forward to continuing the conversation.