The impacts of COVID-19 on individuals, communities and insurers are continuing to unfold and no doubt present uncertainty. However, the current disruption also serves to highlight the importance of lessening reliance on federal financial relief and, instead, creating financial resilience at the community level.
As disaster losses escalate around the globe, the difference between economic damages and the amount that is insured — known as the natural catastrophe protection gap — is an issue of increasing focus for community leaders and policymakers, according to Andy Read, Vice President of Public Sector Practice at Guy Carpenter, and Carolyn Kousky, Executive Director of Wharton Risk Management and Decision Processes Center at the University of Pennsylvania.
According to catastrophe modeler AIR Worldwide, only about 25 percent of economic losses from natural catastrophes are insured globally, and the uninsured portion could potentially exceed USD 1 trillion in a particularly bad year.
Without disaster insurance, households and small businesses are often left struggling to repair and rebuild, reliant on competitive public relief dollars that can be stretched thin. Research has found that having insurance improves recovery outcomes: It can lessen the negative impact of a catastrophic event on the broader economy and speed rebuilding, sustaining economic activity and protecting credit ratings. The reach of its potential impact means that closing the protection gap is an important public policy concern.
Many attempts have been made to address the protection gap; however, a persistent lack of insurance coverage is continually made apparent following rare and large events. Reasons for the lack of catastrophe coverage range from perfectly rational affordability concerns to a litany of behavioral biases exhibited by consumers, insurers and regulators.
In short, individuals and businesses are often only compelled to buy coverage by law or as a condition for accessing credit; so coverage levels generally remain quite low.