Extreme events require new forms of financial collaboration to become more resilient

Abstract

Extreme events are events that are rare, unpredictable, or predictable and have a significant impact on the economy and financial markets. On average, 70% of losses related to natural catastrophes remain uninsured and are challenging individuals, businesses, and municipalities. The difference between economic losses caused by disasters and the amount of those losses covered by insurance coverage is called the “insurance protection gap.” Among the climate-related catastrophic events, flooding creates the most significant loss burden. To close the insurance or climate protection gap, it seems imperative to collaborate across sectors and apply public–private partnership models to improve resilience and recovery capabilities. Traditional risk financing models are well suited for rather predictable events. They may also rely on assumptions and historical data that may not be relevant in the face of rapid change and uncertainty. To address the risks associated with extreme events, it may be necessary to adopt new forms of financial collaboration that are more flexible, decentralized, and comprehensive in their approach. These novel models could involve increased cooperation between public and private sectors, the introduction of innovative financial instruments, and the use of cutting-edge technologies such as blockchain and artificial intelligence. One way in which these fresh forms of financial collaboration can enhance resilience is through the establishment of public–private partnerships, which can unite diverse stakeholders to combine resources and expertise to tackle societal challenges such as natural disasters and climate change. By sharing risk and resources, these partnerships can contribute to the creation of more durable and sustainable solutions. A public–private partnership is more than just buying insurance coverage but still provide an economically viable relationship and all stakeholders involved should benefit from it.