Closing the Disaster Insurance Gap

Disaster coverage is an important component of resiliency as it provides more funds – and provides them faster – than relying on other sources of assistance.  However, in many countries around the world only a small fraction of disaster damages is insured.  Referred to as the disaster insurance gap, this phenomenon afflicts low- and high-income countries alike.

There are many causes of the disaster insurance gap, challenges that impact both the demand and supply of coverage.  For example, from a demand perspective, consumers are often unaware of or misunderstand their risk.  Some do not understand the role and function of insurance.  They may not be able to afford the policy or not think it is worth it.  High transaction costs associated with finding coverage can decrease insurance take-up, as can excessive optimism, or simply having too many other things to worry about.  From a supply perspective, insurance companies face challenges of correlated losses, potentially catastrophic events, and adverse selection that can make the necessary premium more than insureds are willing or able to pay.

In response to these challenges, governments around the world have intervened in these markets.  These interventions have taken a wide variety of forms including the direct writing of insurance to households through quasi-public or fully public insurance programs, the creation of high risk pools, the offering of reinsurance or backstops to firms partially or completely paid for with taxpayer funds, and enactment of mandates for insurance purchase, among others.

The Policy Incubator is undertaking several projects aimed at developing new approaches for closing the disaster insurance gap.  We are looking at new private-public partnerships for flood insurance.  We are investigating tools that build on behavioral economics, such as “opt-out” coverage.  And we are looking at new models, including pooling structures and parametric designs, that could offer coverage to many that are currently uninsured, such as low income families.