A new Moody’s report emphasises that the protection gap in natural catastrophe losses cannot be closed by property and casualty (P&C) insurers and reinsurers alone, with more than 50% of these losses uninsured in 2025.
The report finds that since 2015, 57.8% of catastrophe losses have gone uninsured, while the damages from nat cats has only continued to grow, highlighting the need for a mix of approaches to close the gap between economic and insured losses post-event.
The report suggests that improving risk awareness, strengthening disaster resilience of property and infrastructure, scaling up risk transfer solutions, and combining government and private-sector resources could play a part in closing the protection gap.
Moreover, the report disclosed that catastrophes with high, infrequent losses, such as earthquakes, have the largest protection gap. In many markets, earthquake insurance take-up rates remain relatively low because coverage is optional, costly, or perceived as unnecessary, contributing to some of the largest protection gaps across natural catastrophe perils.
This means that roughly 84% of US earthquake exposure is uninsured, among the highest protection gaps of any US peril, according to Moody’s data. The report warned that despite these events being rare, they strike many policyholders at once. The second largest gap of 83% is in the flood perils.
In contrast, wildfires are relatively frequent, and the peril’s protection gap is only 27%. However, Moody’s explained that a severe wildfire usually costs far less than a severe earthquake, as consumers and businesses are more willing to buy coverage, and mortgage lenders typically require it, so the wildfire protection gap is much smaller.
The protection gap for severe convective storms is 48% despite it being frequent and moderately severe, as insurance take-up rates are high. This is followed by hurricanes with a gap of 49%, due to surge charges and lenders needing customers to buy cover.
Moody’s explained, “P&C re/insurers must charge enough premium to pay claims, stay within regulatory capital requirements, and generate returns for shareholders.
“These constraints limit how much catastrophe risk they can safely insure. In addition, customers’ inability to afford coverage or the absence of coverage requirements means certain risks go uninsured.”
The report further explained that since insurers cannot fully absorb correlated tail risk, they use reinsurance to support their capital, but “reinsurers face the same balancing act between holding sufficient capital and earning enough return on extreme catastrophe risks. Insurance-linked securities and public-private financing tools can help narrow the protection gap.”
Other factors contributing to the protection gap, as per the study, are the cyclical nature of the industry and insurance pricing.
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