As natural disaster losses continue to rise, bridging the so-called protection gap will require strong collaboration between the public and private sectors—not limited to the insurance industry—according to the head of a global organization of insurance supervisors.
The protection gap is the shortfall between the total economic losses caused by events like hurricanes, droughts, or major floods, and the portion of those losses that is actually covered by insurance.
“With the protection gap expanding rapidly, it’s becoming hard to fully address the issue through insurance-based solutions alone,” said Shigeru Ariizumi, Chair of the International Association of Insurance Supervisors, in an interview with Bloomberg on Wednesday. The IAIS is a global standard-setting organization that develops and promotes principles and guidance for the insurance industry.
Insured losses from natural catastrophes could climb to $145 billion this year—significantly exceeding the 10-year average—as factors like population growth, urban expansion, and climate change intensify the risks, according to an April estimate from the Swiss Re Institute.
The rising costs make it essential that the insurance industry “reach out not only to regulators and supervisors, but also to broader policymakers, government departments outside of insurance, academia, and even customers to work together and figure out how to tackle this issue,” Ariizumi said.
Ariizumi spoke near Durban, South Africa, on the eve of a Thursday panel dedicated to addressing the protection gap. The event, held in parallel with the G-20 finance ministers’ meetings, is expected to feature World Bank President Ajay Banga and the Chair of French insurer AXA SA among its attendees.
To tackle losses from natural disasters, Ariizumi suggested that multiple forms of collaboration are possible—including public-sector participation in sharing risks, particularly when the scale of an event exceeds what private financial institutions can bear alone.
The IAIS Chair also urged regulators to support the growth of alternative risk-transfer solutions, such as parametric insurance—which provides payouts when specific disaster-related triggers are met—and catastrophe bonds.
“It’s becoming increasingly difficult for insurance companies to take on certain risks, and in some countries, insurance availability and affordability are emerging as serious concerns,” Ariizumi said.
If the insurance industry can offload a portion of these risks, public markets could serve as an effective solution, he added, underscoring the need for transparent and comprehensive disclosures to inform bond investors.
The catastrophe bond market—commonly used by insurers to transfer extreme risks to capital markets—is projected to grow by 20%, reaching $60 billion by the end of 2025, according to hedge fund Fermat Capital Management.
Following this week’s meetings in South Africa, a report is anticipated to be published outlining the challenges and opportunities of cross-sector collaboration. The document will feature examples of potential solutions that countries can tailor according to their risk profiles, fiscal capacities, and other relevant factors.
At recent G-20 meetings, nations like Brazil and South Africa have advocated for increased climate support from more developed economies. However, the extent of U.S. participation remains uncertain, given President Donald Trump’s moves to reduce the country’s engagement in climate initiatives such as the Paris Agreement and the Just Energy Transition Partnerships. Meanwhile, the U.S. has faced severe climate-related disasters this year, including devastating wildfires in California and deadly floods in Texas.
“The expanding protection gap is a global challenge that includes emerging countries, as well as advanced economies,” Ariizumi said. “Since it’s a global issue, I believe the response must be global as well.”
Top photograph: Homes surrounded by flood waters after Hurricane Beryl made landfall in Sargent, Texas, US, on Monday, July 8, 2024. Photo credit: Eddie Seal/Bloomberg
