From Risk to Resilience. Closing the Climate Insurance Protection Gap

The world’s economy is insufficiently protected against climate disasters. The accelerating pace and severity of extreme weather events are exposing significant gaps in our collective physical and financial resilience systems. In a growing number of regions, communities and businesses are facing mounting economic losses without adequate financial protection. This underscores the urgent need for comprehensive climate adaptation measures coupled with expanded insurance coverage.

Insurers play a systemic role in shouldering financial risks that would otherwise hit economies in a disorderly manner. By pooling premiums and mutualizing risks, they spread disaster costs across time and space, contributing to economic stability. Beyond simply indemnifying losses, insurers can also support climate adaptation by incentivizing risk prevention measures, thereby reinforcing broader societal resilience. Policymakers and regulators have recognized this role in climate adaptation as a key insurer responsibility.

There is a tension between insurers’ collective role and their individual incentives. The insurance industry’s collective function is to pay for damages after disasters, but each individual company strives to maintain low loss ratios. Confronted with rising claims and exposures, insurers typically react by increasing premiums, shrinking coverage or withdrawing from high-risk zones. These are financially rational responses to preserve each insurer’s solvency and profitability in the short term, but together they erode the broader risk pool needed to sustain insurance availability and affordability over the long term.

When insurers stop covering climate risks, these risks are transferred onto individuals, businesses, and taxpayers. Insufficient insurance coverage not only undermines the financial system’s ability to absorb shocks but also has wider economic, fiscal, and social repercussions. Insurance protects mortgage lending, underpins business investments, and empowers entrepreneurs to innovate. It shields vulnerable households against catastrophic loss, curbs inequality by preventing single events from having existential consequences, and cushions public finances against shocks. A retreating insurance market, therefore, imperils growth, social equity, and governments’ budgets.

Closing the climate insurance protection gap requires coordinated policies to enhance both physical and financial resilience. Misaligned incentives between public authorities, insurers and insurance customers can jeopardize financial stability. A collaborative multi-stakeholder roadmap is needed to mitigate climate risk through physical adaptation measures and to ensure that the residual financial losses are shared across all economic actors. Our policy recommendations comprise 1) actions within the direct remit of insurance regulators and supervisors, and 2) proposals to link them to broader climate‑resilience strategies.

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