UK microprudential view on insurance protection gaps

Protection gaps in general insurance, covering risks like cyber, wildfires, and flooding, are a growing concern for regulators and central banks.

The UK insurance industry, particularly the London Market, is central to global discussions on these gaps and the evolving boundaries of insurability.

The PRA's review considered how these gaps interact with its objectives, including safety and soundness and policyholder protection.

While protection gaps can arise from insurers' prudent risk management, they can indirectly create risks to the safety and soundness of UK insurers and banks.

These include heightened concentration risk, increased net exposure when reinsurance capacity is limited, and financial institutions struggling to access insurance for their own operational risks.

The PRA aims for a proportionate approach to avoid unintended adverse outcomes, acknowledging the tension between firm prudence and policyholder access.

Protection gaps hold significant implications for financial stability, a key remit of the Financial Policy Committee (FPC).

While actions to make insurers safe generally support stability, risk-reducing steps by insurers, as withdrawing from certain lines, could widen gaps and pose systemic risks.

This creates a tension between prudent risk management and the potential for higher uninsured losses to spill over into the wider financial system.

The Bank of England monitors these interlinkages, particularly in areas like climate and cyber.

Protection gaps can also hinder economic growth by slowing recovery after disasters and increasing pressure on public and private finances.

The PRA supports insurance coverage and innovation through its proportionate promotion of safety and soundness.