The Natural Catastrophe Protection Gap: Measurement, Root Causes and Ways of Addressing Underinsurance for Extreme Events†

Understanding and managing connected extreme events

“…The earlier examples of Hurricanes Harvey and Maria in 2017, and the simultaneous California wildfires in 2017 and again in 2019, are illustrative. The complexities associated with recognizing and responding to such perils are amplified when the regions affected are underinsured and/or repeatedly exposed [75][76][77] . Additionally, the global 'protection gap'-the portion of the economic cost of disasters not covered by insurance-is still a concern for increasingly at-risk regions within Latin America, Africa and Asia 78 .…”

Diversification in Catastrophe Insurance Markets

“…Behavioral heuristics and biases are also frequently used to explain the failure; see, for example, Froot and Stein (1998), Cummins and Mahul (2009) and Jaffee (2015), which concluded that lack of information or the biases in estimating the underlying loss distribution prevent insurers from aligning the perceived risk with their actual risk exposure. See also Holzheua and Turner (2018) for recent discussion on protection gap.…”

Demand for Multi-Year Catastrophe Insurance Contracts: Experimental Evidence for Mitigating the Insurance Gap

“…Finally, to the best of our knowledge, no one has investigated how potential changes in the value of the asset might affect (multi-year) insurance decisions and the emergence of under-insurance. As Holzheu and Turner (2018) have pointed out, people tend not to update their insurance policies even when there may have been additions or changes to the house itself, there were changes in housing regulations, or economic circumstances that affect the value of the house changed (e.g., cyclical movements in market values). People may become underinsured because they are unwilling to undertake the effort of updating their insurance policies (which may also involve some financial costs).…”

“…People may become underinsured because they are unwilling to undertake the effort of updating their insurance policies (which may also involve some financial costs). Holzheu and Turner (2018) point out that the reasons for the occurrence of underinsurance among those who do purchase insurance have been barely investigated.…”

“…Another issue that raised concern is that the amount of cover is often lower than the value of assets at risk so that the insurance policy does not fully cover homeowners' losses from a catastrophic event (Holzheu & Turner 2018). One possible reason for this under-insurance is that the value of assets increases over time, but often the amount covered by an insurance contract when it is rolled-over does not increase sufficiently to account for the increased value of assets or the increased costs of reconstruction.…”