Haven't we heard a lot about the Protection Gap this year?
Today, let's talk about SMEs and insurance, which play a critical role in both production and employment in our country, similar to many other countries.
In the aftermath of the 2023 earthquakes, one of the definitions we heard most often was "Protection Gap". The protection gap defines the uninsured losses in any country. It is a dynamic gap that is affected by many factors such as changes in economic power, GDP and population, as well as risks such as climate change, cyber hazards, epidemics or technological and behavioral developments.
The Dashboard prepared for the members of the European Union has published analysis of the major disasters and protection gaps the EU has experienced since the 1980s, as well as forecasts of future protection gaps by country and risk. Reducing the protection gap is on the agenda of every country.
You may recall Munich Re's table that I shared in my article "Is Global Warming a Lie?". The cost of natural disasters was 270 Billion USD in 2022, of which 110 Billion USD was covered by the insurance sector. In the adjacent table, the blue shows the insured events (40%). The remaining 160 Billion USD is the amount of damage that countries or individuals will cover by their own resources (Protection gap 60%).
The financial burden of the February 2023 earthquakes is estimated between 105 and 130 Billion USD, of which only 5 Billion USD was covered by insurance. If we take 105 Billion as a base, only 4% was insured - meaning that the protection gap during the earthquake was 96%.
In all the 2023 sector conventions, it was underlined that the target should be to reduce the protection gap. It was stated that in developed countries this is around 50%, and in our country, with the increase in insurance coverage, at least 35% should be targeted.
Increasing insurance coverage is not the only way to address the protection gap. The first and foremost goal should be to reduce and eliminate the factors that cause climate change. Non-life insurance protections are short-term contracts that are repriced annually. Their prices are adjusted as the risk changes. Considering the increasing frequency/intensity of certain events, as we experienced this year, prices were adjusted in case insurance became unaffordable. Over time, these adjustments could deter consumers from taking out insurance - we have already seen this happen - which could further exacerbate the protection gap.
Thus, it is necessary to determine a roadmap and keep insurance costs in balance by managing risks and trying to minimize the losses that may occur, while continuing to take out insurance in order not to be unprotected against increasing natural events.
Major industries are able to retain more risk due to their financial strength, which allows them to allocate resources to risk management investments and focus more on managing risk in-house. However, this is unfortunately not the case for SMEs and small businesses.
According to the information published by TOBB SME Research and Consultancy Center Directorate (2020), 99.8% of all enterprises in Turkey are SMEs and SMEs provide 76.7% of Turkey's total employment.
KOSGEB 2023 report shows that the share of SMEs in exports is gradually increasing. In 2021, the share of SMEs in exports, which was 30.4% in 2021, increased by $ 6.7 billion in 2021 and reached $ 67.6 billion. In 2021, 2.5% of total exports were realized by micro, 10.7% by small and 17.2% by medium-sized enterprises.
Following the 2023 earthquakes, the state prepared and announced many support packages for businesses operating in the region in order to restore them to their pre-earthquake condition. Although I cannot estimate the monetary size of the support provided to those affected by earthquakes, floods and fires to date, these support packages, most of which consist of loans from state-owned banks, are ultimately financed from our national wealth. I don't know whether the impact of the support on relief and recovery has been measured, but in the end these funds will be reclaimed.
The lack of insurance in the region after the earthquake had been emphasized. But there is a report I came across recently showing that the extent of the lack of insurance is very alarming: Uğur Gülen, President of TSB, who made statements within the scope of March 1-7 Earthquake Week, cautioned that although Turkey is an earthquake country, the insurance penetration rate remains lower than last year, and despite the expected Marmara Earthquake, which is estimated to cause more than 100 billion dollars of damage, the insurance penetration rate in the region is at the level of 10%. 10% !
Istanbul reached the highest GDP in 2021 amounting to 2 trillion 202 billion 156 million TL and had a share of 30.4% of the total GDP. The Marmara Region's total share was 45.47%. The main dominance of the Marmara Region in the Turkish economy is in the fields of industry, trade and services, and ranks first in Turkey in this respect. The region, which is the heart of production and income, is also densely populated. Approximately half of the region's income comes from the industry, and the fact that the insurance rate is still low after the natural disasters that have occurred over the years has been mentioned everywhere. So, what is being implemented to increase this rate?
In terms of natural disasters and operational risks, I believe SMEs are the most vulnerable businesses. On the other hand, SMEs are also where development and revitalization will start after a disaster.
SMEs are the lifeblood and indispensable parts of economies, as they have a flexible structure that can quickly become operational without the requirement for huge capital, huge facilities, long periods of time and a large number of employees to make various products when needed.
Factors such as weak risk measures, inadequate knowledge, low insurance awareness, financial competence, low investment budgets, economic conditions, and dependence on credit can be listed as reasons for the lack of insurance for SMEs, whose assets are of utmost critical importance.
Given that SMEs usually operate under a single roof, they are completely affected by a disaster, and many of them are forced to cease operations or even stop commercial operations completely after a disaster.
When we look at SME Insurance solutions, we see policies with narrow scope and insufficient limits, which I have often criticized. Loss of Profit is usually not provided, or business interruption coverage is provided at a low and fixed price, and Employer's Liability limits are nowhere near the compensation paid in reality. Furthermore, these package policies include clauses stating that the SME needs to make many investments (Subjectivities). Underinsurance is one of the biggest problems. Damage is the most important experience in understanding insurance; how can SMEs trust insurance if there is no conscious underwriting process or - ultimately - no benefit?
Despite the fact that the sector makes statements such as "SMEs are very valuable, the insurance rate is low", we do not observe much of an action when we consider how much it supports or encourages SMEs to increase insurance coverage.
SMEs operating in riskier industries such as plastics, chemicals and forestry products also have a serious problem of not being insured, mainly due to insufficient risk measures. When you ask for an offer from insurance companies for an SME working in plastics today, the answer is "We cannot provide coverage due to our risk acceptance principles".
The government can contribute to the increase in insurance coverage with a proactive approach by supporting risk investment and insurance expenditures after each disaster, instead of loans or subsidies, the burden of which will be much heavier for the whole country in the following years. Insurance awareness can be increased by expanding the powers and functions of accredited experts in risk management in cooperation with the government and insurance companies; risk management investments can be supported and SMEs can be insured, leading to a reduction in the protection gap over the years.
With its accumulated claims experience, the insurance industry is well-versed in international know-how and local regulatory practices, and has incredible data in its records. SMEs need guidance. Beyond providing advice, insurance companies can contribute immensely to SMEs by acting together and providing resources, and they can become the most important actor in solving the problem through cooperation, exchange of ideas and mutual incentive programs with the government.
In addition to the basic risk measures applicable to every industry, the sustainability of commercial operations can be ensured by taking operation-specific risk measures, contributing monetarily to investments for this purpose, and pioneering the reorganization of insurance coverage to meet the needs. In my opinion, it is not a fantasy to ensure sustainability and create a win-win situation by establishing a systematization with regular auditing and monitoring.
In order to close the insurance gap, we should start with SMEs. I would volunteer for such a project without a moment's hesitation.
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