Europe's commercial and specialty insurance penetration gap

Data Analytics - Photo by Deng Xiang on Unsplash

Insurance plays a fundamental societal role in that it protects people and businesses in the face of disaster. As the taker of an insurance policy, if you suffer a financial loss covered by your policy, your insurer will pay you a sum of money to help you recover. This allows people and businesses to plan with confidence, and it also drives sound risk management and prevention, because insurers will typically only accept ‘good risks’ (an exception would be so-called ‘distressed risks’, see below). That's why insurance matters.

Non-life insurance, also referred to as Property & Casualty (P&C) insurance, includes personal policies taken out by individuals and consumers – typically motor, homeowners or residential property policies – and commercial insurance taken out by businesses. Specialty insurance further refers to insurance taken out by individuals and / or businesses in respect of large, niche, complex, unique or so-called distressed risks presenting a higher-than-average likelihood of a claim.  

Examples of commercial and specialty insurance include commercial property, general liability, marine, aviation, construction, cyber, political risk and trade credit, terrorism, distressed property risk insurance or flood insurance. Commercial and specialty insurance plays a key role in the global economy as it fosters business and societal resilience, thus enabling and driving economic growth. 

To measure the uptake of insurance we can conduct an ex-ante exercise by measuring the degree of insurance premium penetration in a particular economy, or an ex-post assessment by calculating the losses covered by insurance policies relative to the total economic losses incurred over a certain period of time (typically a calendar year). Both methods are used to estimate the degree of underinsurance or insurance protection gap, and both can be used to assess societal resilience. The lower the insurance penetration rate or the higher the insurance-to-economic-loss distance, the greater the protection gap, and vice-versa. 

Both the US and Europe are mature insurance markets with global and cross-border commercial and specialty insurance hubs (New York, London, Frankfurt, Zurich). The US operates a P&C or Admitted market for standard commercial risks, and a separate Surplus Lines market for specialty risks or risks which have been declined by the Admitted market. Europe, on the other hand, does not distinguish between commercial and specialty risks and both types of insurance are underwritten in the same market according to the same rules. Commercial and specialty insurance data is also much more readily available in the US than in Europe, which lags in terms of data reporting and publication. 

Because of the reasons mentioned above, calculating insurance penetration in the US is much easier than doing so in Europe. As the following graph shows, commercial and specialty insurance penetration in the US has remained relatively constant over the past two decades with an average of 2.1% broken down as 1.8% penetration from the P&C (Admitted) Commercial market and an additional 0.3% penetration from the Surplus Lines (Specialty) market. The Surplus Lines market has gained in prominence over the past years and in 2024 it accounted for 0.5% of the total commercial and specialty insurance penetration rate of 2.2%. 

Europe, on the other hand, has a much more fragmented insurance market, and as mentioned above it does not distinguish between commercial and specialty risks, and insurance premium data is not as readily available. Having looked at various sources, I estimate that in 2024 the European Union (EU) had a commercial and specialty insurance market of approximately €180 billion, which is the same as saying 1% of the EU's total GDP (€17.9 trillion), or half the penetration in the US. Thus, if we add 1.2% of additional penetration to reach the 2.2% of insurance penetration present in the US, we arrive at the conclusion that in 2024 the EU had an estimated insurance penetration gap of approximately €215 billion (i.e. 1.2% of €17.9 trillion GDP) (see chart below).

The question is why this difference with the US? There are likely multiple drivers for this, including supply-side and demand-side causes such as more limited capital in Europe due to legal uncertainty linked to fragmented and divergent market regulation (supply-side), and different cultural attitudes towards litigation which drive down demand for liability insurance (demand-side). A north-south and west-east cultural divide towards the value of insurance and the role of the state - often perceived as the ultimate guarantor in case of natural or man-made disaster - is also likely playing a role in keeping demand suppressed.

To find solutions we first need to get the diagnosis right, but to get the diagnosis right we should perhaps start by having as clear a picture as possible on the size, composition and trend of the European commercial and specialty insurance market. Yet without a clear distinction at the reporting level we will continue to struggle to get a clear and consistent dynamic view of this market. To be clear, the US also suffers from a commercial and specialty insurance gap, as demonstrated by numerous studies, but at least we know how much of it is being underwritten and by whom. Good and reliable data is critical.