Economic and Social Development – What Do Protection Gaps Have to Do With It?

Economic and social development is the cornerstone upon which societies build their future. It involves improving a community's well-being and quality of life through sustainable growth. At the heart of this development lies sustainable resilience—the ability of a society to withstand and recover from setbacks, be they economic downturns, natural disasters, or social upheavals. Sustainable resilience is not just recovery but strengthening the fabric of society to withstand future shocks.

In this context, the United Nations Sustainable Development Goals (SDGs) provide a comprehensive framework to achieve a better and more sustainable future for all. The SDGs aim to address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice[1]. Each goal is interconnected, highlighting the complex nature of development and the need for integrated solutions.

One lesser-known but critical aspect affecting both development and resilience is the concept of protection gaps. Protection gaps represent the portion of economic losses arising from risk events, such as natural catastrophes, health crises, and other emergencies or unforeseen events, that are not covered by insurance and other forms of financial protection. The magnitude of these gaps are crucial for assessing a community's or a nation's resilience to shocks. The larger the gap, the more significant the economic and social impact of a disaster, potentially derailing development efforts, undoing hard-earned development progress, and exacerbating poverty and inequality.

Protection gaps directly impact several SDGs. For instance, when a natural catastrophe strikes an uninsured or severely underinsured community, the financial burden can push households into poverty (SDG 1), hinder access to healthcare (SDG 3), and damage critical infrastructure (SDG 9), derailing progress toward these goals. Moreover, significant protection gaps can exacerbate inequalities (SDG 10) as vulnerable populations without insurance coverage bear the brunt of disaster losses.

To illustrate the connection between protection gaps and economic development, let's examine the March 2011 Tohoku earthquake in Japan and the February 2011 Christchurch earthquake in New Zealand. Both were devastating disasters that severely impacted the communities in the two developed countries.

Estimated from 2009-2010 figures, the property insurance penetration[2] rate in New Zealand was 0.83% whilst the equivalent in Japan was 0.26%[3]. This provides a comparison of protection gaps between New Zealand and Japan, both developed countries, with higher insurance penetration rates and, hence, lower protection gaps than most emerging countries.  That said, Japan's insurance penetration for property insurance is relatively lower compared to New Zealand's. The implication of this can be seen from the 2011 Tohoku earthquake, which brought estimated total economic losses of up to USD 300 bn, about 5.4% of Japan's GDP.

Insured losses for this earthquake in Japan were estimated to be about USD 35 bn, up to 17% of the total losses[4], i.e., a protection gap of about 83%. Japan's GDP growth in 2010, which had seen recovery from the global financial crisis of 2008-2009, was at 4.1%. In 2011, Japan's GDP growth dropped to 0.0% before increasing to 1.4% in 2012[5].

In comparison, the February 2011 earthquake in New Zealand, considered an aftershock of the 2010 Canterbury earthquake, resulted in USD 15 bn in economic losses, about 10% of New Zealand's GDP. 80% of the losses were insured, i.e., a protection gap of about 20%. New Zealand's GDP growth in 2009 was -0.1%, moving to 1.5% in 2010, and continued on the upward trend to 2.2% in 2011 and 2.3% in 2012.

Whilst many factors influence GDP growth year-on-year, an indicator of economic development, it can be argued that in New Zealand, despite the economic losses from the earthquake being a more significant proportion of its GDP, with the relatively smaller protection gap, where the New Zealand Earthquake Commission played a pivotal role in providing the insurance protection, the nation continued moving forward on its economic progression path.  In Japan, the trajectory of economic growth was adversely impacted by the earthquake, driven in part by the need for the Japanese government to reallocate resources from other areas to support reconstruction and recovery post the earthquake, and also by the Japanese households and businesses that had to bear the bulk of the cost of damages to themselves and their businesses.

Contrasting the experiences of New Zealand and Japan, with Haiti, provides a stark illustration of the correlation between protection gaps and economic resilience. Haiti, with significantly lower insurance penetration and a vast protection gap, suffered immensely when faced with an earthquake. In the case of the January 2010 earthquake in Haiti, the economic losses, estimated at USD 8 bn (121% of GDP), were predominantly uninsured (1% insured[6], indicating a protection gap of 99%), placing an immense burden on the government and international aid, with GDP growth in Haiti dropping to -5.7% in 2010. The aftermath was a slow, painful recovery process hampered by the lack of financial resources to rebuild and recover.

For illustration purposes, the discussion above has only referred to one peril – earthquakes. However, protection gaps can arise from a wide range of risks that span beyond natural catastrophes, including mortality, health, retirement, and even cyber risks. The linkages between the protection gaps arising from these different risk types and economic and social development and resilience remain the same, impacting individuals, families, businesses, and societies.

Addressing protection gaps requires a multifaceted approach. At Global Asia Insurance Partnership, we outline three categories of solutions that should be considered holistically due to their inherent interdependencies.

1. Risk Reduction: This involves measures to minimize potential exposures and losses, such as infrastructure improvements, disaster preparedness, and climate adaptation strategies.
2. Increasing Insurance Penetration: Enhancing access to insurance products can provide a financial safety net, ensuring funds are available to restore, rebuild and sustain livelihoods after adversity, reducing the economic impact on individuals and governments.
3. Fiscal Risk Financing: Implementing financial strategies, such as the establishment of risk pools, contingent budgets, budget allocations, establishing reserves, and/or catastrophe bonds, can provide countries with the necessary funds to respond to disasters.

The discourse on economic and social development is incomplete without a thorough understanding of the size of, and need to reduce protection gaps. Addressing protection gaps through risk reduction, increased insurance penetration, and fiscal risk financing is not merely a matter of policy—it's a critical investment in our collective future. By adopting a holistic approach that acknowledges the interdependence of these three categories of solutions, opportunities to achieve more comprehensive outcomes with more efficient use of resources can be unlocked.

As we aim for better resilience and economic and social development in Asia, it is imperative that we prioritize the narrowing of protection gaps. Doing so will safeguard economic and social progress and enhance community resilience, paving the way for a more sustainable and equitable future.