The specter of climate change points to a future that will see more frequent and severe weather events. This is likely to increase reliance on governments to absorb more costs, according to Guy Carpenter’s Protecting our Planet and the Public Purse report. Insurance penetration is already falling behind rising loss trends and the cost of disasters is increasingly being borne by governments.
The Protection Gap
The difference between total and insured costs depicted in Figure 10 is known as the “protection gap,” a large component of which falls back on governments. The phenomenon of nations bearing an increasing share of climate costs is occurring around the world, particularly in developing countries where private insurance for both businesses and individuals is less prevalent (see Figure 11).
Insurance penetration issues also exist in mature economies, where flood and earthquake are typically underinsured. In Western Europe, approximately 40 percent of total costs from storms fall to governments or back onto disaster victims, compared to in excess of 60 percent and 70 percent for flood and earthquake, respectively. A similar issue exists in North America, although the level of underinsurance for flood is worse here.
The lack of flood insurance in the United States is reflected in Figure 12, which shows that two of the country’s top three events that required the highest percentage of federal relief funding relative to total damage involved significant flooding (Superstorm Sandy and Hurricane Katrina). The other trend to emerge from this data is that disaster spending has risen steadily over the past 50 years.