When disaster strikes: how insurance can help people prepare financially

While saving lives should always be the primary focus of government efforts to protect against disaster risks, promoting financial preparedness is critical to ensuring that those affected have the resources they need to recover. For most households and businesses, insurance – specifically property insurance – is the primary tool for building financial preparedness when disaster strikes.

Insurance can provide those impacted with funds to repair their damaged homes and businesses, reimburse temporary living expenses or replace lost revenues resulting from business interruption. However, for many types of hazards in many parts of the world, insurance markets only cover a small share of overall losses.

Insurance markets absorb a lower share of the damages and losses from earthquakes than for any other major natural hazard, despite earthquakes accounting for 17.5% of all global natural hazard losses between 2000 and 2025.^[1]

Insurance coverage for earthquake risk is usually not included in standard property insurance policies offered to households and businesses in many countries. For regions with significant exposure to earthquake risk, and given the potential for extremely large and correlated losses, the cost for this additional coverage can be very high, which can dissuade people from acquiring coverage.

As a result, many people are uninsured – leaving the staggering burden of financial losses to households, businesses and governments. In Colombia, insurers have received claims for an amount equivalent to approximately 15% of the estimated damage (Fitch Ratings, 2026), although this is an early estimate that will surely evolve as damage is further assessed and claims are submitted. In Venezuela, the insured share of damages and losses could be less than 5%, although the challenging macroeconomic environment has led to significant uncertainty in terms of estimates of insured losses (Risk & Insurance, 2026).

^[1] _{OECD calculations using data from Swiss Re, sigma database. All rights reserved.}

Insurance markets also absorb a much lower share of damages and losses in lower-income countries, such as Nepal, where devastating floods killed hundreds in September. OECD work on the drivers of financial protection gaps in natural hazard insurance in Asian countries identified important constraints on the demand for insurance. This includes limited understanding of the benefits of insurance, low trust in insurance as a means to provide financial protection, and income constraints.

Concerning the supply of insurance, access to the data needed to confidently underwrite coverage and to the reinsurance needed for insurers to manage their exposure to catastrophic risks can be big constraints, particularly in lower-income countries. A follow-up report planned for 2027 will incorporate Nepal’s recent experience, with the hope of identifying ways to enhance its financial resilience in the context of increasing risk of glacial flooding in the Himalayas. 

Despite the devastation caused by natural hazards, across countries and regions, including Colombia, Panama, Venezuela, Nepal and parts of Europe, economic losses in the first part of 2026 were well-below long-term trends (Bevere and Singh, 2026). However, the installation of a particularly strong – if not historic – El Niño in the coming months could quickly change that. El Niño conditions manifest when sea surface temperatures in the tropical Pacific are at least 0.5°C higher than normal. This has implications for temperature and precipitation patterns across the world.

As a result, some regions are more prone to tropical cyclones (e.g. western Pacific), heavy rainfall and flooding (e.g. Peru, Pacific coast of the United States, particularly California), droughts (e.g. Australia) or heatwaves (e.g. South and Southeast Asia, Brazil),  with greater impacts expected during a stronger El Niño. Signs of these changes may already be visible in the reduced cyclone activity in the North Atlantic and higher activity in the Pacific (Marsh Re, 2026).    

Many of the types of losses that could result from the impacts of El Niño are not likely to be insured. Droughts, for example, lead to lower agriculture yields, but the penetration of agricultural insurance is low in many countries. Droughts can also lead to interruptions in power generation in countries that depend on hydro and nuclear power generation and transport disruptions should a drought make some waterways impassible. However, these types of operational disruptions are often not insured (Lockton, 2026). 

Governments have an important role in ensuring that adequate financial protection is available to respond to catastrophic risks, especially in a world of evolving risks. In Financial Protection Against Catastrophic Risks: Floods, Fires and Other Major Risks, the OECD provides a framework to help governments evaluate whether government-supported financial protection is needed to address gaps in insurance coverage for different types of catastrophic risks and the most appropriate form to provide such support.

The OECD’s Working Party on Insurance and Pensions will meet during the next OECD Financial Markets Week in early November to build on this work by developing detailed guidance on how to assess gaps in insurance coverage for natural hazard risks and monitor challenges in the availability, affordability, take-up and adequacy of this coverage. This work will support governments in their efforts to understand the implications of emerging and evolving natural hazard risks.

The Working Party will also discuss the potential contribution of parametric insurance to responding to coverage gaps. Parametric insurance, a form of insurance that pays out based on event characteristics – such as lower than usual rainfall, winds above a certain threshold or an earthquake of a certain magnitude - rather than incurred losses, could provide a promising approach to developing coverage to protect against the disruptions that are likely to increase with more volatile weather conditions.  

Enhancing financial preparedness is an important component of disaster risk reduction. Continued collaboration between governments and the insurance sector will be critical for ensuring the availability of affordable insurance coverage against evolving risks and improving households and businesses understanding of the need for financial protection against these risks.