Joy Agwunobi
As climate-related disasters intensify across the globe, the widening gap in natural catastrophe (NatCat) insurance coverage is emerging as a critical concern, particularly for emerging markets and developing economies (EMDEs).
This growing protection gap, experts warn, poses significant economic risks and threatens to reverse developmental progress in countries least equipped to absorb the financial shocks of disasters.
A new joint paper released by the World Bank and the International Association of Insurance Supervisors (IAIS), titled “G20 Sustainable Finance Working Group Input Paper: Identify and Address Insurance Protection Gaps – July 2025,” calls for urgent global action to close insurance protection gaps, with a focus on practical, scalable strategies for EMDEs.
The report, developed as a technical contribution to the G20 Sustainable Finance Working Group (SFWG), outlines the systemic implications of underinsurance in the face of rising natural disasters and offers a blueprint for reform.
The report notes that the frequency and severity of natural catastrophes ranging from floods and wildfires to hurricanes and earthquakes—have risen sharply in recent decades. These events are causing increasingly severe economic damage, a trend amplified by environmental degradation, expanding urbanisation in high-risk zones, and rising asset concentrations in vulnerable areas.
The consequences of these disasters are becoming more pronounced and systemic, placing growing financial pressure on both public and private institutions. The report states that insurance should be viewed as a central pillar in disaster risk financing strategies, adding that “increasing damage and economic losses from natural catastrophes are widening protection gaps and causing strain on economies and government budgets, with potential systemic ramifications.”
While the insurance protection gap is a global issue, the report emphasises that EMDEs face a disproportionate burden. These countries often lack sufficient financial resources, institutional capacity, and insurance infrastructure to recover effectively after catastrophic events. As a result, large segments of their populations remain exposed to severe financial and humanitarian consequences when disasters strike.
Data from the 2024 IMF Financial Access Survey referenced in the report highlights the scale of the disparity. In surveyed EMDEs, the number of non-life insurance policies per 1,000 adults ranged from as low as 9 to around 3,000. In comparison, the range in advanced economies extended from 868 to nearly 5,800. Similarly, while insurance covered 31 percent of global disaster losses in 2023, most EMDEs saw coverage rates fall below 10 percent.
The consequences of these gaps are far-reaching. The report notes that sectors such as agriculture, real estate, infrastructure, and public assets are among the most vulnerable. In agriculture alone, Swiss Re Institute data cited in the report shows that more than 85 percent of insurable crop production in many EMDEs remained uninsured as of 2022, contributing to a global crop protection gap estimated at $113 billion.
Underlying barriers to coverage
According to the report, several persistent structural barriers underlie the insurance protection gap in EMDEs. These include low levels of financial literacy, affordability constraints, limited trust in insurers, and insufficient institutional capacity among both insurers and supervisory authorities.
Additionally, the paper identifies challenges such as weak capital markets, limited access to international reinsurance, and inadequate risk data infrastructure. Many EMDEs also lack regulatory environments conducive to fostering robust insurance markets, further limiting their ability to implement sustainable coverage schemes.
Even where insurance products exist, uptake is often low due to lack of awareness, accessibility challenges in remote areas, and overreliance on government or donor-funded post-disaster assistance. The report states, “the take-up of NatCat insurance by individuals is hampered by lack of access to insurance, lack of knowledge or trust in insurance, and reliance on government intervention or international aid to support disaster risk financing after the disaster has struck.”
The report highlights that natural catastrophes not only damage private property but also severely impact public infrastructure and services. In the absence of adequate insurance for public assets, governments are left to shoulder the costs of reconstruction and service restoration—often without sufficient fiscal buffers. The paper underscores the importance of securing timely funding for post-disaster recovery to minimise disruption and long-term economic impact.
To close the protection gap, the report outlines several foundational steps necessary for developing effective insurance-based strategies. It emphasises the need to enhance the capacity of countries to assess their exposure to natural catastrophe risks and accurately measure existing protection gaps.
Equally important is the implementation of risk-based and proportionate supervisory frameworks that can support the development of resilient insurance markets.
The report also highlights the importance of increasing financial literacy and raising public awareness about the benefits of insurance, particularly in communities where trust in insurance institutions remains low. Lastly, it calls for the introduction of incentives that encourage risk-reducing behaviors across various sectors, thereby strengthening overall disaster resilience.
These building blocks are critical for establishing sustainable insurance ecosystems that can scale coverage while supporting broader climate resilience goals.
The paper identifies technology and innovation as key levers for expanding access to insurance in under-served regions. Among the most promising tools is parametric insurance, which offers rapid payouts based on predefined event triggers such as rainfall levels or seismic activity, bypassing lengthy claims assessments.
Parametric solutions are particularly suited to EMDEs where infrastructure for traditional insurance may be lacking. For example, agricultural index insurance—including area-yield index insurance (AYII) and weather index insurance (WII)—is being used to cover smallholder farmers and fisherfolk across Africa, Asia, and Latin America.
The benefits of parametric models, according to the report, include fast disbursement of funds, lower administrative costs, and reduced risk of moral hazard or adverse selection. These features make them well-suited to both sovereign-level disaster response and individual policyholder needs in vulnerable regions.
In addition to parametric products, other technologies such as satellite imagery, drone surveillance, and AI-driven risk modeling are reshaping the insurance landscape. These tools can improve risk assessment, streamline claims processing, and lower premium costs by enhancing accuracy and transparency.
The report also draws attention to the role of microinsurance, particularly in the form of disaster-specific coverage for low-income populations. When bundled with early-warning systems and risk reduction initiatives, microinsurance can enhance the financial resilience of vulnerable groups and improve their ability to bounce back after disasters.
In some jurisdictions, mandatory NatCat insurance has been introduced either as a standalone product or bundled with property insurance policies. Such measures aim to broaden participation, reduce adverse selection, and improve affordability through risk pooling.
The report stresses the importance of access to global reinsurance markets in enabling local insurers to manage risk portfolios more effectively. It notes that international reinsurers can help absorb large-scale losses, thereby protecting domestic financial systems and enabling continued coverage after major catastrophes.
It also references the use of catastrophe bonds (cat bonds) and other Insurance-Linked Securities (ILS) as innovative tools that allow insurers to transfer NatCat risks to capital markets. These instruments expand the risk-bearing capacity beyond traditional reinsurers and offer a broader base of financial support during extreme events.
Another key recommendation in the report is the establishment of Public-Private Insurance Programs (PPIPs), which bring together government agencies, insurance supervisors, private sector players, international development partners, and civil society.
According to the paper,such partnerships are designed to combine public oversight with private sector expertise in risk assessment, underwriting, and claims management. PPIPs can also facilitate the development of national risk pools, design of inclusive products, and implementation of coverage schemes tailored to local needs.
The report emphasises that addressing the NatCat protection gap will require deliberate trade-offs and policy decisions. Governments, it suggests, must weigh costs, fiscal space, and institutional capacity in selecting the most appropriate interventions. It added that while various tools and instruments are available, their effectiveness depends on local market conditions, institutional readiness, and coordinated multi-stakeholder action.
The World Bank–IAIS report makes it clear that rising disaster losses are not merely environmental or humanitarian challenges, but a growing threat to financial stability particularly for emerging markets. It underscores that insurance-based solutions can play a transformative role in narrowing protection gaps, given their potential to reduce risk exposure and limit economic fallout.
As the threat of natural catastrophes continues to grow, the paper argues, addressing insurance shortfalls is not only prudent fiscal policy, but a global development imperative.
