The Natural Catastrophe Protection Gap: Measurement, Root Causes and Ways of Addressing Underinsurance for Extreme Events

  • Thomas Holzheu
  • Ginger Turner


The global property protection gap in natural catastrophe risk has widened steadily over the past 40 years. In historical terms, we find that most underinsurance of extreme events is for climate-related events such as flood and windstorm, but in expected terms, earthquakes comprise the largest share of underinsurance. Using a framework to define the protection gap in historical and expected terms, this paper breaks down the gap by geography and risk type and presents an empirical analysis of the key drivers of the gap. First, uninsured expected Cat losses are estimated using models that combine geophysical vulnerability maps, economic exposure data and insurance market information. Second, each country’s expected (or optimal) property insurance penetration is modelled and compared to actual penetration to derive a measure of property underinsurance. Third, we explore the factors that affect property insurance demand, applying regression analysis to an unbalanced panel data set that includes 53 countries observed over a 15-year period. Several significant economic, financial market, sociodemographic, cultural and institutional variables are identified. The results lead to a taxonomy of the root causes of underinsurance and a set of proposed measures to narrow the protection gap.


catastrophic losses catastrophe modelling insurability property insurance protection gap underinsurance 


  1. Aseervatham, V., Born, P. and Richter, A. (2013) Demand reactions in the aftermath of catastrophes and the need for behavioral approaches, Working Paper Presented at the American Risk and Insurance Association 2013 Annual Conference.Google Scholar
  2. Barnett, B.J., Barrett, C.B. and Skees, J.R. (2008) ‘Poverty traps and index-based risk transfer productsʼ, World Development 36(10): 1766–1785.CrossRefGoogle Scholar
  3. Berliner, B. (1985) ‘Large risks and limits of insurabilityʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 10(4): 313–329.Google Scholar
  4. Bin, O. and Landry, C.E. (2013) ‘Changes in implicit flood risk premiums: Empirical evidence from the housing marketʼ, Journal of Environmental Economics and Management 65(3): 361–376.CrossRefGoogle Scholar
  5. Born P. and Klein, R. (2016) ‘Catastrophe risk and the regulation of property insurance marketsʼ, Journal of Insurance Regulation 35(5): 105–139.Google Scholar
  6. Browne, M.J., Chung, J. and Frees, E.W. (2000) ‘International property-liability insurance consumptionʼ, The Journal of Risk and Insurance 67(1): 73–90.CrossRefGoogle Scholar
  7. Browne, M.J. and Hoyt, R.E. (2000) ‘The demand for flood insurance: Empirical evidenceʼ, Journal of Risk and Uncertainty 20(3): 291–306.CrossRefGoogle Scholar
  8. Cai, H., Chen, Y., Fang, H. and Zhou, L.-A. (2009) Microinsurance, trust and economic development: Evidence from a randomized natural field experiment, Working Paper No. 15396, National Bureau of Economic Research.Google Scholar
  9. Cameron, L. and Shah, M. (2012) Risk-taking behavior in the wake of natural disasters, IZA Discussion Papers No. 6756, Institute for the Study of Labor (IZA).Google Scholar
  10. Clarke, D.J. (2016) ‘A theory of rational demand for index insuranceʼ, American Economic Journal: Microeconomics 8(1): 283–306.Google Scholar
  11. Cole, S. (2015) ‘Overcoming barriers to microinsurance adoption: Evidence from the fieldʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 40(4): 720–740.Google Scholar
  12. Cole, S., Giné, X., Tobacman, J., Topalova, P., Townsend, R. and Vickery, J. (2013) ‘Barriers to household risk management: Evidence from Indiaʼ, American Economic Journal: Applied Economics 5(1): 104–135.Google Scholar
  13. Courbage, C. and Liedtke, P.M. (2003) ‘On insurability, its limits and extensionsʼ, Insurance Research and Practice 18(2): 44–49.Google Scholar
  14. Cummins, J.D. (2006) ‘Should the government provide insurance for catastrophes’, Federal Reserve Bank of St. Louis Review 88(4): 337–379.Google Scholar
  15. Cummins, J.D. and Barrieu, P.M. (2013) ‘Innovations in insurance markets: Hybrid and securitized risk transfer solutionsʼ, in G. Dionne (ed.) Handbook of Insurance, 2nd ed. New York: Springer.Google Scholar
  16. Cummins, J.D. and Weiss, M.A. (2016) ‘Equity capital, internal capital markets, and optimal capital structure in the US property-casualty insurance industryʼ, Annual Review of Financial Economics 8(1): 121–153.CrossRefGoogle Scholar
  17. Demirguc-Kunt, A., Beck, T. and Honohan, P. (2008) Finance for All? Policies and Pitfalls in Expanding Access. Washington, DC: World Bank.Google Scholar
  18. Deryugina, T. (2013) Reducing the Cost of Ex Post Bailouts with Ex Ante Regulation: Evidence from Building Codes (July 18, 2013). Available at SSRN:
  19. Dillon, R.L., Tinsley, C.H. and Burns, W.J. (2014) ‘Near-misses and future disaster preparednessʼ, Risk Analysis, 34(10): 1907–1922.CrossRefGoogle Scholar
  20. Dumm, R.E., Sirmans, G.S. and Smersh, G. (2011) ‘The capitalization of building codes in house pricesʼ, The Journal of Real Estate Finance and Economics 42(1): 30–50.CrossRefGoogle Scholar
  21. Ehrlich, I. and Becker, G.S. (1972) ‘Market Insurance, self-insurance, and self-protectionʼ, The Journal of Political Economy 80(4): 623–648.CrossRefGoogle Scholar
  22. Eling, M., Pradhan, S. and Schmit, J. (2014) ‘The determinants of microinsurance demandʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 39(2): 224–263.Google Scholar
  23. Enz, R. (2000) ‘The S-curve relation between per-capita income and insurance penetrationʼ, The Geneva Papers on Risk and Insurance—Issues and Practice 25(3): 396–406.Google Scholar
  24. Ernst and Young (2014) Global Consumer Insurance Survey. Available at
  25. Esho N., Kirievsky, A., Ward, D. and Zurbruegg, R. (2004) ‘Law and the determinants of property-casualty insuranceʼ, The Journal of Risk and Insurance 71(2): 265–283.CrossRefGoogle Scholar
  26. FEMA (2014–2016) Monthly reports December 2014, December 2015, December 2016. Available at
  27. Feyen, E., Lester, R. and Rocha, R. (2011) What Drives the Development of the Insurance Sector?An Empirical Analysis Based on a Panel of Developed and Developing Countries, Policy Research Working Paper No. 5572, World Bank, Washington, DC.Google Scholar
  28. Gallagher, J. (2014) ‘Learning about an infrequent event: evidence from flood insurance take-up in the United Statesʼ, American Economic Journal: Applied Economics 6(3): 206–233.Google Scholar
  29. Gilbert, R. (2001) Doing more for those made homeless by natural disasters, Disaster Risk Management Working Paper Series 1, World Bank, 2001.Google Scholar
  30. Giné X., Townsend, R. and Vickery, J. (2008) ‘Patterns of rainfall insurance participation in rural Indiaʼ, World Bank Economic Review 22(3): 539–566.CrossRefGoogle Scholar
  31. Gollier, C. (1997) ‘About the insurability of catastrophic risksʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 22(2) 177–186.Google Scholar
  32. Ibragimov, R., Jaffee, D. and Walden, J. (2009) ‘Nondiversification traps in catastrophe insurance marketsʼ, Review of Financial Studies 22(3): 959–993.CrossRefGoogle Scholar
  33. Ibragimov, R. and Walden, J. (2007) ‘The limits of diversification when losses may be largeʼ, Journal of Banking & Finance 31(8): 2551–2569.CrossRefGoogle Scholar
  34. Jaffee, D., Kunreuther, H. and Michel-Kerjan, E. (2010) ‘Long-term property insuranceʼ, Journal of Insurance Regulation 29, 167–187.Google Scholar
  35. Jaffee, D.M. and Russell, T. (1997) ‘Catastrophe insurance, capital markets, and uninsurable risksʼ, The Journal of Risk and Insurance 64(2), 205–230.CrossRefGoogle Scholar
  36. Kleindorfer, P.R, Kunreuther, H. and Ou-Yang, C. (2012) ‘Single-year and multi-year insurance policies in a competitive marketʼ, Journal of Risk and Uncertainty 45(1): 51–78.CrossRefGoogle Scholar
  37. Kousky, C. and Cooke, R. (2012) ‘Explaining the failure to insure catastrophic risksʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 37(2): 206–227.Google Scholar
  38. Kousky, C., Michel-Kerjan, E.O. and Raschky, P.A. (2013) Does federal disaster assistance crowd out private demand for insurance, Working paper 2013–10, Risk Management and Decision Processes Center, The Wharton School, University of Pennsylvania.Google Scholar
  39. Kousky C. and Kunreuther, H. (2014) ‘Addressing Affordability in the National Flood Insurance Programʼ, Journal of Extreme Events 1(1): 1–28.CrossRefGoogle Scholar
  40. Kunreuther, H. (2015) ‘The role of insurance in reducing losses from extreme events: the need for public–private partnershipsʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 40(4): 741–762.Google Scholar
  41. Kunreuther, H. and Lyster, R. (2016) ‘The role of public and private insurance in reducing losses from extreme weather events and disastersʼ, Asia Pacific Journal of Environmental Law 19: 29–54.CrossRefGoogle Scholar
  42. Kunreuther, H., Meszaros, J., Hogarth, R.M. and Spranca M. (1995) ‘Ambiguity and underwriter decision processesʼ, Journal of Economic Behavior and Organization 26(3): 337–352.CrossRefGoogle Scholar
  43. Kunreuther, H and Michel-Kerjan, E. (2010) ‘Market and government failure in insuring and mitigating natural catastrophes: how long-term contracts can helpʼ in J.R. Brown (ed.) Public Insurance and Private Markets. Washington: The AEI Press, pp. 115–142.Google Scholar
  44. Kunreuther, H.C. and Michel-Kerjan, E.O. (2007) Climate change, insurability of large-scale disasters and the emerging liability challenge, NBER Working Paper No. 12821, National Bureau of Economic Research. Google Scholar
  45. Kunreuther, H. and Pauly, M. (2004) ‘Neglecting disaster: Why don’t people insure against large losses? ʼ Journal of Risk and Uncertainty 28(1): 5–21.CrossRefGoogle Scholar
  46. Lazo, J.K., Bostrom, A., Morss, R.E., Demuth J.L. and Lazrus, H. (2014) ‘Communicating hurricane warnings: Factors affecting protective behaviorʼ, Submitted to Risk Analysis, June 2014.Google Scholar
  47. McKinsey (2014) Global insurance industry insights: An in-depth perspective. Available at–an-in-depth-perspective
  48. Meyer, R.J., Baker, J., Broad, K., Czajkowski, J. and Orlove, B. (2014). ‘The dynamics of hurricane risk perception: Real-time evidence from the 2012 Atlantic hurricane season’, Bulletin of the American Meteorological Society 95(9): 1389–1404.CrossRefGoogle Scholar
  49. Michel-Kerjan, E., Czajkowski, J. and Kunreuther, H. (2015). ‘Could flood insurance be privatised in the United States? A primer’, The Geneva Papers on Risk and InsuranceIssues and Practice, 40(2): 179–208.Google Scholar
  50. Milliman (2017) Global Takaful Report 2017: Market trends in family and general Takaful. Available at
  51. Millo, G. (2016a) ‘The S-curve and realityʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 41(4): 608–625.Google Scholar
  52. Millo, G. (2016b) ‘The income elasticity of nonlife insurance: A reassessmentʼ, The Journal of Risk and Insurance 83(2): 335–362.CrossRefGoogle Scholar
  53. Mossin, J. (1968) ‘Aspects of rational insurance purchasingʼ, Journal of Political Economy, 76(4, Part 1): 553–568.CrossRefGoogle Scholar
  54. Old Dominion University Social Science Research Center. (2016) Life in Hampton Roads survey, Press Release No. 5. Available at
  55. Outreville, J.F. (1990) ‘The economic significance of insurance markets in developing countriesʼ, Journal of Risk and Insurance 57(3): 487–498.CrossRefGoogle Scholar
  56. Outreville J.F. (2011) The Relationship between insurance growth and economic development: 80 empirical papers for a review of the literature, ICER Working Paper No. 12/2011.Google Scholar
  57. Park, S.C. and Lemaire, J. (2011) The Impact of Culture on the Demand for Non-Life Insurance, University of Pennsylvania, Wharton School Working Paper IRM WP2011-02.Google Scholar
  58. Schanz, K.U. and Sommerrock F. (eds.) (2016) Harnessing Technology to Narrow the Insurance Protection Gap. Zurich: The Geneva Association.Google Scholar
  59. Schanz, K.U. and Wang S. (eds.) (2014) The Global Insurance Protection GapAssessment and Recommendations, A Geneva Association Research Report. Geneva: The Geneva Association.Google Scholar
  60. Shreve, C.M. and Kelman, I. (2014) ‘Does mitigation save? Reviewing cost-benefit analyses of disaster risk reductionʼ, International Journal of Disaster Risk Reduction 10 (Part A): 213–235.Google Scholar
  61. Swiss Re (2015) Underinsurance of property risks: closing the gap, sigma No. 5/2015.Google Scholar
  62. Swiss Re (2016a) World insurance in 2015: steady growth amid regional disparities, sigma No. 3/2016.Google Scholar
  63. Swiss Re (2016b) Natural catastrophes and man-made disasters in 2015: Asia suffers substantial losses, sigma No. 1/2016.Google Scholar
  64. Treerattanapun, A. (2011) ‘The impact of culture on non-life insurance consumptionʼ, Wharton Research Scholars Journal, Paper 78.Google Scholar
  65. Thaler, R. and Sunstein, C. (2008) Nudge: The gentle power of choice architecture. New Haven, CT: Yale University Press.Google Scholar
  66. Tversky, A. and Kahneman, D. (1973) ‘Availability: A heuristic for judging frequency and probabilityʼ, Cognitive Psychology 5(2): 207–232.CrossRefGoogle Scholar
  67. Von Peter, G., Von Dahlen, S. and Saxena, S. (2012) Unmitigated disasters? New evidence on the macroeconomic cost of natural catastrophes, BIS Working Papers No. 394, December 2012.Google Scholar
  68. World Bank. (2011) Turkish catastrophe insurance pool: providing affordable earthquake risk insurance. Disaster risk financing and insurance, case study. Washington D.C.: World Bank.Google Scholar
  69. World Bank. (2014) World Development Report 2014: Risk and Opportunity: Managing Risk for Development. Washington, D.C.: World Bank.Google Scholar
  70. World Bank. (2015) Global Financial Development Report 20152016: Long-term Finance. Washington, D.C.: World Bank.CrossRefGoogle Scholar
  71. World Economic Forum (2015) The global competitiveness report 20152016. Geneva: World Economic Forum.Google Scholar
  72. Zheng, W., Liu, Y. and Deng, Y. (2009) ‘A comparative study of international insurance marketsʼ, The Geneva Papers on Risk and InsuranceIssues and Practice 34(1): 85–99.Google Scholar

Copyright information

© The International Association for the Study of Insurance Economics 2017

Authors and Affiliations

  1. 1.Swiss Reinsurance AmericasArmonkUSA
  2. 2.Swiss Reinsurance Management LtdZurichSwitzerland

Personalised recommendations