Addressing the Protection Gap 

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Through Public/Private Partnerships 

& Other Mechanisms
Subcommittee Membership

Dan Glaser

President & CEO, 

Marsh & McLennan Companies

Subcommittee Co-Chair

Sean McGovern 

General Counsel, AXA XL 

Subcommittee Co-Chair

Eric Anderson

Co-President, Aon

Amy Bach 

Executive Director,

United Policyholders

Birny Birnbaum

Executive Director.

Center for Economic Justice 

Greg Crabb

President & CEO, Amerisure

John Franchini

Superintendent of Insurance, 

New Mexico

George Keiser

Representative, North Dakota House of 

Representatives

Chris Swift

Chairman & CEO, The Hartford 

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How Do We Define the Protection Gap?

• The term ‘insurance protection gap’ refers to 

the gap between the insured and actual 

economic losses caused by large scale 

catastrophic events.

• Quantifying the uninsured and underinsured 

losses.

• According to Guy Carpenter, “Underinsurance 

for natural catastrophe events has increased 

over time and the resulting economic and 

insured losses have grown on average by 

about 5% annually since 1999.” 

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A Global Look at the Protection Gap by the #’s 

Total coverage gap (all lines):

USD162.5bn

(source: Lloyd’s of London, 2019)

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In 2017, the global catastrophe

protection gap was USD 195bn,

or approximately 59% of total

economic losses of

USD 330bn

(source: Geneva Association, 2018)

The future protection gap is

estimated at more than

USD 150bn

p.a. or about 0.25% of global GDP

(source: Swiss Re, 2019)

70%

of Nat Cat losses globally 

were uninsured between 

1980 and 2017

(source: Geneva Association, 2018)
A Domestic Look at the Protection Gap

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According to the NAIC:

Only 1%

of properties outside of flood 

zones have flood insurance, yet 

half of US floods occur outside 

these areas.

Take up rates of NFIP 

insurance were:

<1% across the 

Midwest (AM Best)

Most small businesses do not

have flood insurance. 

According to FEMA :

40% go out of 

business after a

disaster

Wildfire Losses added up to:

$20Billion 

In 2017 and 2018
Process to Address the Gaps

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Identify the causes of the Protection Gap

Identify where risks can be avoided

Identify how risk can be mitigated

Identify challenges to implementation 

Identify how risk can be transferred

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• Consumer behaviour: 

“Moral Hazard” – Do not buy coverage due to belief that Government will cover costs of 

catastrophe event (despite government relief provided generally purely ‘survival’)

Studies show that insurance purchases for flood, wildfire etc increase in the immediate 

year post-event yet, renewals gradually drop in subsequent years in the absence of further 

disaster events (average of 9 years)

Lack of clear consumer education: 

Lack of true understanding of the risk & tendency to under-estimate vulnerability to 

disaster risk

According to the Army Corps of Engineers, a home owner in a special flood hazard area 

has of experiencing a base flood in a 30-year period, the average 

length of a mortgage. 

a 26% percent chance 

Solution: Product Development and Consumer Choice: Need better government policies 

to encourage homeowners and businesses to protect themselves against these risks. More 

coverage options with better terms are necessary.

Lack of clarity around terms of coverage of the policy i.e. belief that a standard homeowner policy covers flood and quake

Economic – including affordability: Clear & consistent barrier to obtaining coverage. 

Solutions: Provide assistance for policyholders through means-testing and consider riskbased pricing.

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1 Identify the Causes of the Protection Gap
Causes of the Protection Gap

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As an industry, we need to help people 

understand their catastrophic event exposures, 

the potential risks, and their impact so they can 

make informed decisions. That’s why it’s 

imperative for the industry to provide data and 

tools to agents/brokers to make it easier for 

them to explain catastrophic event risk to their 

clients and distribute policies
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Flood Earthquake Wildfire Wind

2 Identify Where Risks Can Be Avoided

• Since 1980, 246 weather-related disasters in 

the United States caused at least $1 billion in 

damages each.

• Damage from there “billion-dollar disasters” 

together totaled over $1.6 trillion1

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• Adhere to recommendations from the National 

Mitigation Investment Strategy.

• The Investment Strategy’s purpose is to increase the 

nation’s resilience to natural hazards through more 

effective, efficient mitigation investment. 

FEDERAL 

GOVERNMENT

(G) 

INDIVIDUALS

( ID ) INDUSTRY

( I )

3 Identify How Risks Can Be Mitigated
Goals and Recommendations for Mitigation

Goal 1: Demonstrate How Mitigation Investments Reduce Risk 

Through Effective Education (G, I & ID)

• Making Risk Mitigation Relevant to Community: This can be achieved by tying 

mitigation investment to community values.

• Building Community Capacity & Consumer Education: This can be done through 

education and training resources . Examples include: (i) identify a Chief 

Resilience Officer, (ii) create and partner with government agencies to develop 

education materials.

• Develop Universally Accepted Mitigation Measures: This can aid in decisionmaking for mitigation investment, and may increase the efficacy of Public Private 

Partnerships, which play a critical role in managing risk.

• Educate Policymakers: Demonstrate that every dollar spent on mitigation and 

model codes saves several dollars in post-event costs. For example, the Federal 

Government appropriated nearly $140 billion nat cat related expenses in 2017 

(Approximately 18% 2018 fiscal deficit). 10
Goal 2: Coordinate Investment in Mitigation to Reduce Risk (G&I)

• Information Sharing, Access and Availability to Risk Information: Create a 

central repository or website with state/local resources, and share 

information between government and industry. This will make mitigation 

strategies more effective. For example, FEMA has begun to share certain 

flood data with the private sector, however, greater detail and scope is 

needed to facilitate more private participation in market.

• Alignment of Program Requirements and Incentives: Where possible, the 

Federal Government and nonfederal partners should align strategies and 

funding opportunities to prioritize risk-based investments—as noted in the 

Disaster Recovery and Reform Act of 2018.

• Easier to Access to Mitigation Funding: Where possible, the Federal 

Government and nonfederal partners should simplify mitigation funding 

processes, coordinate co-funding, and encourage plan integration.

• Coalition Building: Partner on mitigation and resiliency efforts with relevant 

bodies.

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Goal 3: Financial incentives to implement mitigation measures 

(G&I)

Incentives may include:

• Direct government subsidies (G)

• Tax Benefits (G)

• Risk-based insurance pricing so that premiums may change to reflect any 

reduction in risk. (G & I)

• Encourage Fannie Mae, Freddie Mac and their regulators to adjust mortgage 

rates to facilitate the purchase of appropriate nat cat insurance coverage, 

including flood.(G)

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Goal 4: Make Mitigation Investment Standard Practice (G)

• Building Codes: Encourage communities to adopt and enforce up-to-date 

codes: https://buildstrongamerica.com.

• Zoning: Develop and enforce land use policies that restrain growth in highrisk areas i.e. (i) Landscaping regulations to mitigate against wildfires and; 

(ii) Fuel load reductions to reduce wildfires.

• Critical Infrastructure: Strengthen critical infrastructure lifelines and 

consider value of proactive mitigation.

• Mandated Insurance: Laws mandating certain types of coverage and at 

certain thresholds (i.e. flood insurance within certain flood zones).

• Government Backstop Programs: These backstops can facilitate private 

sector insurance solutions likely to include partial coverage options. 

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• Increase Take-up Rate of Traditional Products: Educate consumers about the effective 

insurance products readily available in the marketplace. Agent training and increased 

marketing can increase consumer awareness about their coverage options.

• Innovative Products:

– Microinsurance

– Parametrics

– On-demand Insurance

• New and Enhanced Digital and Mobile Technologies: These technologies help to 

promote affordability, awareness and product appeal.

• Product Design: Embrace the latest technologies to focus on developing appropriately 

regionalized models to assess the risk posed by the perils.

• Product Transparency: Homeowners policies should have explicit disclaimers on what 

is included/non included for specific perils. For example, earthquake and flood 

coverage not included in most homeowners policies.

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Goal 5: Effective Use of Traditional Industry Solutions and 

Innovative Products to Increase Transparency (I)
Increased Risk-Based Pricing (reflecting mitigation and/or increased risk) : may exacerbate other issues 

surrounding take-up of insurance in terms of availability and affordability. Need to find balance between viability 

& affordability to ensure participation in high risk areas

Data Collection: Needs more specificity including to be sufficiently geo-referenced, with a broad range of 

indictors such as critical infrastructure, details of claims i.e. recently released FEMA data does not provide high 

geographic specificity or reflect certain aspects of claims such as the frequency of an event. 

Implementation of Hazard Conscious Building Codes: Can be patchy at local level due to limited resources, lack 

of coordination, lack of active enforcement. Codes and standards may vary within states and regions. Possible 

Solution: consider minimum uniform standards

Not enough focus on mitigation across all hazard levels and frequency: Solution: need to customise mitigation 

efforts to account for all possible consequences across all possible hazard levels not just on mitigating extreme 

events / “1/100 year event”

Proposal of Mandated Insurance: May be unpopular, enforcement can be difficult, may make it less affordable, 

does not solve areas outside designated areas e.g. NFIP - a house just 1km outside a high hazard flood risk area 

does not have to purchase flood insurance. Also difficult for communities to know if mitigation efforts required 

under the NFIP program are being sufficiently enforced. 

Mandatory Offering (Such as CEA): Consumers may continue to perceive themselves as not at risk due to lack of 

education and consumer behaviour, while pricing may be a deterrent leading to further poor take-up rates. 

Behavioural Factors: Research suggests that along with peoples’ tendency to under-estimate the risk of lowprobability events, people do not tend to purchase against low probability and high-loss events, even if this is 

offered at favourable premiums (Holzheu & Turner, 2017)

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4 Identify the Challenges to Implementation
According to a paper from the Progressive Policy Institute:

“The expanded use of private risk transfer activities could be a valuable tool for 

protecting taxpayer dollars. A March 2019 report by the Government Accountability 

Office (GAO) identified as many as 148 programs providing “federal insurance and other 

activities that transfer risk or losses from adverse events to the government.”

“...aggregate liability are substantial, and that more agencies should have the authority 

to consider and, if appropriate, enter into reinsurance agreements or other 

arrangements that spread some of this risk to willing private actors.

According to the NMIS study: 

“There are new and expanded public and market-based financial products and funding 

approaches available that can better support distributing the cost of mitigation across 

both the Federal Government and nonfederal partners.”

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5 Identify How risk can be Transferred
Options to Transfer or Share Risk (G & I)

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• Reinsurance

Encourage the use of traditional reinsurance products. The effectiveness of 

the NFIP’s reinsurance program is just one example of how federal 

insurance, loan or loan guarantee programs protect taxpayers.

• Environmental impact bonds, pay-for-performance models, and 

insurance-linked securities reduce risk and deliver returns for investors

For example, risk transfer occurred after Superstorm Sandy when New York City’s 

Metropolitan Transportation Authority issued $200 million of catastrophe bonds. 

Catastrophe bonds transferred catastrophic risk from New York City’s 

Metropolitan Transportation Authority to the capital markets39 and provided 

additional financial protection against storm surge2.

• Catastrophe bonds have also transferred risk for earthquakes3 and wind4. 

The Federal Government and nonfederal partners should consider the 

costs and benefits of all available financial products to transfer and reduce 

risk, and promote leading practices in their use. 
Sources:

National Mitigation Interments Strategy https://www.fema.gov/media-library-data/1565706308412-

19739d7deeca639415cc76c681cee531/NationalMitigationInvestmentStrategy.pdf

(1)Billion Dollar Weather and Climate Disasters: Overview,” National Oceanic & Atmospheric 

Administration (NOAA) National Centers for Environmental Information (July 9, 2018), 

https://www.ncdc.noaa.gov/billions/. This figure does not include the billions of dollars of additional 

damage caused by less costly weather events.

(2)39 Federal Insurance Office, U.S. Department of the Treasury, The Breadth and Scope of the Global 

Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United 

States, at p. 39 (December 2014), 

https://www.treasury.gov/initiatives/fio/reports−and−notices/Documents/FIO%20−Reinsurance%20

Report.pdf (defining catastrophe bonds and other alternative reinsurance instruments).

(3) Gissing, Andrew (2017) “Disaster Risk Management: Australian Challenges”: 

https://apfmag.mdmpublishing.com/disaster-risk-management-australian-challenges/

(4) Holzheu, Thomas & Turner, Ginger (2017), “The Natural Catastrophe Protection Gap: Measurement, 

Root Causes and Ways of Addressing Underinsurance for Extreme Events”: 

https://econpapers.repec.org/article/palgpprii/v_3a43_3ay_3a2018_3ai_3a1_3ad_3a10.1057_5fs412

88-017-0075-y.htm

(5)40Artemis, Catastrophe Bond and Insurance−Linked Securities Deal Directory: Embarcadero Re 

Ltd. (Series 2012−2), http://www.artemis.bm/deal_directory/embarcadero-re-ltd-series-2012-2/.

(6) 41 Artemis, Catastrophe Bond and Insurance−Linked Securities Deal Directory: Calypso Capital II 

Ltd. (Series 2013−1), http://www.artemis.bm/deal_directory/calypso−capital−ii−ltd−series−2013−1/.

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