The Property Insurance Protection Gap: Reasons and Response


Population is on the rise. So are property values and severe catastrophes. As a result? The insurance protection gap is growing too. Here are the details …

  • The population is growing. The U.S. Census Bureau predicted world population to reach 7.4 billion as of last January; the United States was estimated to comprise 4.4 percent of the total. With over 300 million people, we’ve grown 0.71 percent since last year. Put differently, someone is born every eight seconds; someone dies every 10 seconds.
  • Property values are rising. According to Reuters, U.S. house prices are expected to rise at twice the rate of inflation, with an “acute shortfall of affordable homes” to last through the coming year.
  • Catastrophes are multiplying. According to Risk & Insurance, “catastrophes dominated much of the news cycles of late 2017.”
  • Climate change is prompting human migration. Climate change refugees migrated to the U.S., displaced from their homes in Central America, South America, and the Caribbean. Meanwhile, climate refugees are emerging within the U.S. now, too.

The Insurance Gap

All this “makes the protection gap — the difference between total economic and insured losses — an area of great concern,” said R&I contributor Michelle Kerr. The impact of the gap is in our nation’s “ability to rebound from disasters, both physically and economically.”

The most extreme example took place 13 years ago. Hurricane Katrina blew the numbers out of the water, with 67 percent of the losses inflicted not covered by the private market. But the trend is much larger than one fluke year. “The property insurance protection gap has risen steadily over the past 40 years,” Kerr said. At least 70 percent of losses over the last 10 years were not covered.

Flood and earthquake exposures comprise the biggest gap within the United States. “Nationally, there are more than 29 million properties that are at moderate to high risk of flooding but are not subject to mandatory flood coverage because they fall outside of Special Flood Hazard Areas, according to a CoreLogic analysis,” Kerr said.

As for quakes, a mega-quake on the San Andreas fault promises certain disaster any time between now and the next thirty years; even so, most affected properties remain uninsured (87-91 percent).

Possible Responses

While increasing insurance penetration can spread disaster risk and make coverage more affordable, coverage is expensive, and households without a lot to spare aren’t biting. Many property owners assume that FEMA will be there for them when the big one hits – but funding for disaster relief is on the chopping block in Congress.

Legislation could require mandatory earthquake coverage in high-risk areas; for example, something similar to the National Flood Insurance Program could help mitigate those risks.

Regulation is another area where insurers could be pushing for change. For example, in this landscape, there’s no excuse for lax building codes.

Kerr suggests that new insurance models may also provide answers. For example, insurers could tie coverage to the property, not the owner, in five- or 10-year policies that would transfer with ownership, while lowering premiums for properties with features that reduce risk. Or, insurers could partner with mortgage lenders to offer low-interest loans for resilience upgrades.

One thing is for sure: The insurance property coverage landscape is changing. Can your policy administration system keep up? If there’s any doubt, download the Silvervine 6.0 Overview Brochure to learn more about a potential solution.