Moody’s urges insurance gap to be closed
Catastrophe damages are rising, and closing the insurance gap will require a combination of approaches, including strengthening disaster resilience and scaling up risk transfer solutions, according to Moody’s.
The ratings agency notes that 57.8% of global catastrophe losses since 2015 have gone uninsured, resulting in significant financial burdens.
A 1-in-200-year US aggregate catastrophe loss could result in US insured losses of more than $400 billion, consuming a significant share of the roughly $785 billion of global reinsurance capital.
Insurers and reinsurers cannot close the protection gap alone due to their limited capital, which is a fraction of what global catastrophe losses demand, with global capital markets totaling $319 trillion compared to total P&C insurance capital of $1.2 trillion.
Moody’s believes that the insurance-linked securities (ILS) market can play a broader role in narrowing the protection gap by connecting global pools of capital and creating larger, more resilient, and more sustainable risk-transfer systems.
ILS has attractive characteristics for investors, including defined risk periods, attractive risk-adjusted returns, and limited correlation with traditional financial markets, which is expected to drive growth in the market.
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However, investor interest has been constrained by the complexity of ILS and the lack of warning for potential catastrophes, unlike corporate bonds, which often have early signals of financial deterioration.
Moody’s expects the ILS market to continue expanding as institutional investors recognize its role as a diversifying source of return, with growth supported by advances in catastrophe modeling, greater transparency, and standardization across transactions.
Improved access to analytics will also allow investors to evaluate catastrophe risk with increasing confidence and consistency, helping to create a more resilient and sustainable risk-transfer ecosystem.
In certain high-risk areas, insurance coverage may shift from insurers to public-private partnerships, particularly where coverage is unaffordable or unavailable, according to Moody’s.
They expect this shift to occur as the ILS market continues to grow and mature, providing more options for investors and insurers to manage catastrophe risk.
