100-billion-dollar insurance gap that leaves the world exposed

By Caroline Fouvet

Insurance is the art of selling peace of mind; it offers protection when the best made plans fail. However in reality, we are all, to put it mildly, woefully exposed. Recent estimates suggest that a US$ 100 billion ‘protection gap’, has emerged which could threaten public finances and the insurance industry. The gap – the difference between the average cost of natural disasters and the amount insured – has the potential to widen significantly in coming decades, as climate risks increase. The problem is compounded by the fact that at the same time, the global population and infrastructure investment is set to rise, leaving more lives and assets in harm’s way.

However despite these risks, the insurance industry lags behind other institutional investors’ consideration of climate change impacts. According to the Asset Owners Disclosure Project (AODP) Global Climate Index, “only 8% of insurers have staff dedicated to integrating climate risk into the investment process, half as many as pension funds”.

More risk, more cost

Climate change is increasing costs for insurers. In 2016, natural disasters caused US$ 210 billion of economic losses, with floods accounting for the largest share (US$ 62 billion). Further, as insurers are also asset managers their portfolios are also threatened by climate change. According to AODP, 116 global insurers were responsible for US$ 15.3 trillion of investments in 2016, while only one in eight were taking tangible action to manage climate risks to their portfolios.

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