Connecting state and market: Protection Gap Entities

Addressing protection gaps via public-private partnerships

Increasing frequency and severity of catastrophe risk, driven by various factors, is a pressing global challenge that requires collaboration by private and public sector actors. In short, the insurance protection gap is growing, and this is spurring the increasing development of what my colleagues and I have labelled ‘protection gap entities’ (PGEs).

Much of our forthcoming conversations at Aon’s 2019 Hazards Conference will revolve around how governments in both developed and developing economies are turning to innovative market solutions. The PGEs they establish in this regard – whether a risk pool, federal backstop, or parametric products – operate between state and market in developing solutions/schemes that mobilize global (re)insurance capital to address the aftermath of disaster.

Understanding PGEs: Existing between state and market

PGEs are defined by multiple complex, even paradoxical, objectives. Their mandate usually requires them to pursue ‘social’ objectives through market means. This adds complexity to their establishment and to the dynamics involved with their ongoing maintenance. For instance, Governments necessarily have a socially-focused understanding of the problem, with an objective to protect their citizens and communities from disasters:

“Government’s role is to protect its citizens and its communities. We have a social responsibility with the local population. At the end this is our main mandate; to support them.” (Government Stakeholder).

The (re)insurance industry stakeholders necessarily have a market-focused understanding of the problem, that can clash with the social objectives:

“Affordability is always a concern for the industry but at the same time, we’re publicly listed companies, we are not charities. We have shareholders, so we have to charge an appropriate premium.” (Market stakeholder).

The power of PGEs to address societal challenges resides in these multiple objectives and stakeholders coming together. Yet, as this suggests PGEs are founded in complex interdependencies and their success requires those involved to develop sensitivity to and understanding of the different needs of other stakeholders.

Understanding PGEs: Multi-faceted potential for influence

At their inception PGE’s primary mandate is to provide the capital to support recovery following a disaster: bridging the protection gap by providing financial solutions. For instance, they might be established to address a specific disruption in (re)insurance supply or to mitigate the threat of unaffordable insurance. However, if financial solutions lead purely to reconstruction of the status quo, they leave the underlying vulnerability unchanged. Therefore, PGEs social objectives often push them to attempt to reduce the gap by reducing vulnerability, through more resilient forms of building for example. The issue of protection and resilience should, as always, be viewed as entangled.

The effects of PGEs indeed evolve beyond their direct effect on markets and the initial objectives upon which they were founded. First, by collaborating with multiple stakeholders, PGEs have a role in framing the debate and evolving understanding about how to address the protection gap. Second, PGEs generate new knowledge, and often make it publicly available as a social good. For example, in my own country EQC (Earthquake Commission) provides over NZ$16 million worth of funding for research into natural hazard risk as a key player in building knowledge and expertise about risk.

As this suggests the impact and importance of PGEs are immense and goes beyond their role as a financial mechanism. Aon’s Hazard Conference provides a perfect platform for in-depth discussion of such entities and their role in relation to these big questions of protection and resilience we are collectively grappling with.

For more details, visit: https://www.aon.com.au/australia/hazards-conference-2019

This blog is based on research Rebecca Bednarek conducted with Professor Paula Jarzabkowski (Cass Business School), Eugenia Cacciatori (Cass Business School) and Konstantinos Chalkias (Birkbeck, University of London). This blog draws from their 2018 report.

Rebecca Bednarek
Senior Lecturer, Victoria University Wellington
11.15am – 11.40am
Tuesday 24 September