Page 17 - IB March 2025

Insurance

RISKY BUSINESS: BRIDGING THE

INSURANCE GAP

By Paula Jarzabkowski many’. Insurance companies buy a reinsurance policy on
the global market, so as losses increase globally, the cost
The insurance gap is not only a Pacific Island problem. of reinsurance capital goes up around the world, creating a
Australia faces a massive insurance gap that leaves home ripple effect.
and business owners increasingly vulnerable to either dealing • Climate uncertainty increases insurance market volatility
with disasters without being fully insured or paying more for from unexpected losses. Uncertainty is associated with
premiums, even if they live thousands of kilometres from a higher capital reserving by insurers and reinsurers to cover
disaster zone. unexpected losses and is reflected in increased premiums.
That potential lack of insurance cover also has sobering
ramifications for those seeking a mortgage and home Why does it matter?
ownership, especially in a world where climate-linked The insurance protection gap means that global capital does
disasters are increasing. not flow to rebuild homes in local economies after disasters.
The potential solutions are complex and will require Without sufficient insurance, the burden for recovery falls
government action. disproportionately on those who lack sufficient insurance and
In 2022, when disastrous floods hit Queensland and NSW, are already financially and socially vulnerable.
the insured losses alone were more than AU$6 billion, and And being unable to get insurance means people probably
about 48% of Australian losses were not covered by insurance. won’t be able to get mortgages. The broader cost to society
Everyday Australians are facing steep insurance premium is also high, as government disaster funds cover costs like
rises, and the number now seen as being under insurance temporary housing and rebuilding.
stress has increased from 10% in 2022 to 15% last year.
That leaves many people in vulnerable areas underinsured The way forward
or uninsured, and even those who can get insurance are Any approach to the insurance gap needs to bridge both the
paying much more. financial gap and reduce the physical gap.
In advanced economies, there is an assumption that Government-legislated insurance mechanisms, known as
insurance will pay for rebuilding, but a disaster insurance protection gap entities, are needed to subsidise those at high
protection gap means many people affected by disasters are risk to keep them in the insurance pool.
uninsured, with no identified source of funds for recovery. Protection gap entities need to be compulsory to ensure
The recent Los Angeles fires have been estimated to have the entire population can be covered and offer multi-peril
cost up to US$250 billion in economic losses, but only $40 protection that covers all key hazards.
billion was covered by insurance. The frequent criticism of protection gap entities is that they
are unfair to those at lower risk, or that by suppressing price
Why there is a gap signals about high-risk areas they allow people to rebuild in
There are three key reasons for this insurance gap: floodplains or cyclone or bushfire-prone regions.
• In risk-reflective pricing, insurers charge higher premiums Overseas experience shows that any solution will be
to those properties that are likely to incur more losses. complex, requiring collaboration across all layers of
This pricing is based on a combination of previous losses government, targeted risk interventions, and public-private
and proximity to, or location in, high-risk zones, and means collaboration to support the integration of insurance into the
the higher premium reflects the potential for higher loss. resilience ecosystem.
• Insurance is a pooling mechanism, in which the premiums
of the many pay for the losses of the few. As increasingly Professor Paula Jarzabkowski is a professor in strategy in
severe and frequent disasters cause multiple losses, more The University of Queensland’s School of Business. This is an
premium capital is needed to cover the ‘losses of the abridged version of an article first published on 360info.com.

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