Concern grows over widening insurance protection gap
Financial regulators, central banks and governments across advanced economies are becoming more concerned about the widening insurance protection gap.
A growing number of economic losses are going uninsured in the face of an intensification of climate-related disasters, shifting risk from insurers’ balance sheets onto households, businesses and public finances.
This, from the Official Monetary and Financial Institutions Forum (OMFIF), the independent think tank for central banking, economic policy and public investment, which seeks to provide a neutral platform for public and private sector engagement worldwide.
With teams in London and the US, OMFIF focuses on global policy and investment themes relating to central banks, sovereign funds, pension funds, regulators and treasuries. Global public investors with investable assets of $43 trillion are at the heart of this network.
There is concern of a growing risk to financial stability and a new white paper is warning that the trend cannot be reversed without addressing a critical blind spot in financial and supervisory frameworks: the accelerated loss of nature.
OMFIF notes that while climate change is central to the problem, World Wide Fund for Nature’s (WWF) analysis shows that ecosystem degradation is a major and often underestimated source of economic loss.
Healthy ecosystems, such as forests, wetlands and coastal systems, play a crucial role in reducing the physical impacts of extreme weather. When these natural buffers are degraded, climate hazards push risks beyond insurable thresholds.
In regions of widespread deforestation, for example, the risk of large-scale flooding can increase by as much as 700 per cent. This sets off a vicious cycle: losses mount, resilience erodes and insurers pull back, amplifying the impact of the next disaster.
In 2023, global disaster-related losses reached an estimated $2.3 trillion, once indirect impacts and losses from ecosystems were included, revealing the true scale of degraded natural capital and climate change.
Escalating climate losses are straining the ability of insurers to provide affordable coverage, the report says. Insurers are responding to their microeconomic incentives by increasing premiums for property and casualty insurance, reducing the coverage they are prepared to offer or withdrawing entirely from high-risk areas.
• For more on the white paper, Tackling the Insurance Protection Gap, see Related Media
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