By Erin Ayers, Front Page News
Over half of the world’s catastrophe losses go uninsured, but insurers and reinsurers can’t close the natural disaster protection gap on their own, according to a recent report from Moody’s Ratings that suggests governments and the private sector will need to collaborate on solutions.
According to the firm’s analysis, nearly 60% (57.8%) of global catastrophe losses since 2015 have been uninsured. Infrequent but severe, widespread events like earthquakes tend to have the largest protection gap.
“In many markets, earthquake insurance take-up rates remain relatively low because coverage is optional, costly, or perceived as unnecessary, contributing to some of the largest protection gaps across natural catastrophe perils,” said Moody’s. “As a result, roughly 84% of US earthquake exposure is uninsured — among the highest protection gaps of any U.S. peril.”
By comparison, a more frequent peril like wildfire carries a smaller protection gap of about 27% due to generally lower loss severity and more willingness or obligations on the part of consumers and businesses to buy cover.
Similarly, severe convective storm losses are more likely to be insured, resulting in a protection gap of 48%, Moody’s said. Hurricanes have resulted in a protection gap of 49%, just slightly larger than SCS for a less frequent peril.
However, flooding – an increasingly common cause of loss – is “heavily underinsured” with a protection gap of 83%. This is nearly as high as earthquakes but for a more frequent loss.
The capital in the insurance and reinsurance markets would not be able to withstand the full magnitude of extreme catastrophe losses, Moody’s warned.
“Property and casualty (P/C) insurers and reinsurers cannot close the protection gap on their own,” the ratings firm said. “They must charge enough premium to pay claims, stay within regulatory capital requirements, and generate returns for shareholders. These constraints limit how much catastrophe risk they can safely insure. In addition, customers’ inability to afford coverage or the absence of coverage requirements means certain risks go uninsured.”
To illustrate the point, Moody’s explained that a 1-in-200-year aggregate modeled catastrophe loss across all perils for the United States could cause over $400 billion in insured losses.
“This scenario would likely consume a significant share of the roughly $785 billion of global reinsurance capital, triggering sharp price increases, reduced capacity, and balance-sheet stress,” said the firm, adding total losses for insurable property would exceed $1.1 trillion, resulting in a protection gap of about $700 billion.
Tapping into the capital markets for catastrophe bonds, sidecars, and other forms of insurance-linked securities (ILS), has helped bolster the insurance market’s ability to transfer risk, with alternative capital steadily increasing since 2002, Moody’s noted.
From the public perspective, governments around the world already partner with insurers on risk pools and reinsurance mechanisms. Along with further innovation on these fronts, the ratings firm advised infrastructure investment to help close the gap.
“The protection gap is particularly acute in emerging markets, reflecting lower insurance penetration. As a result, a larger share of losses remains uninsured, shifting the burden to governments and households and resulting in greater economic and fiscal strain than in developed markets,” said Moody’s.
The firm added, “The protection gap is often framed as an insurance problem, but ultimately it is a capital allocation challenge. The opportunity ahead is therefore not simply to transfer more risk, but to create larger, more resilient and more sustainable risk-transfer systems.”
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Managing Editor Erin Ayers can be reached at [email protected].
