A new study conducted by Moody’s has stressed 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’, titled ‘Scaling Capital Markets to Narrow the Insurance Protection Gap’ indicated that 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.
According to a news report from Reinsurance News, an industry-foocued online medium, the Moody’s 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.
In addition, 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.
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According to Moody’s data, this implies that roughly 84% of US earthquake exposure is uninsured, among the highest protection gaps of any US peril, as the agency warned that despite these events being rare, they stroke many policyholders at once being the second largest gap of 83% is in the flood perils.
However, the report reflected that in contrast, wildfires were relatively frequent, and the peril’s protection gap is only 27%.
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 study also showed that the protection gap for severe convective storms stood at 48% despite it being frequent and moderately severe, as insurance take-up rates are high; followed by hurricanes with a gap of 49%, due to surge charges and lenders needing customers to buy cover.
Moody’s further clarified: “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”, it added.
The report further disclosed that since insurers cannot fully absorb correlated tail risk, they used 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.”
The study identified other factors contributing to the protection gap as the cyclical nature of the industry, and insurance pricing.
