Governments play a critical role in ensuring that adequate financial protection is available to individuals, households and businesses to mitigate the financial consequences of large-scale catastrophes. This chapter provides a framework to help governments evaluate the need to provide government-supported financial protection. It also outlines some considerations for determining whether to provide government-supported financial protection through a public-private insurance programme or a public compensation and financial assistance arrangement.
Financial Protection Against Catastrophic Risks
Floods, Fires and Other Major Risks
Abstract
Individuals, households and businesses are exposed to a broad range of social, economic, technological and environmental risks throughout their lifetimes. The materialisation of these risks can have financial implications for those impacted, such as costs to rebuild damaged property, replace damaged equipment or household contents, fund health care needs or recover lost income or revenue. Where damage or disruption is significant, many individuals, households or businesses would struggle to absorb the resulting financial costs, leading to financial vulnerabilities.
Access to financial protection can play a critical role in protecting individuals, households and businesses from potentially devastating financial losses, providing a secure source of funding to support recovery and facilitating their participation in economic activities, including through access to credit. Pooling the risks of many individuals, households or businesses through an insurance arrangement can also have broader macroeconomic benefits by supporting a more optimal use of capital (Vaughan and Vaughan, 2008[1]) and reducing the need for pre-cautionary savings.
Financial protection can also contribute to mitigating the economic, social and financial consequences of large-scale events. A variety of studies focused on insurance for natural hazard risks, for example, have demonstrated the benefits of this form of financial protection in reducing contractions in economic activity (Melecky and Raddatz, 2011[2]; Von Peter, Von Dahlen and Saxena, 2012[3]; 2024[4]) and accelerating recovery (Cambridge Centre for Risk Studies and AXA XL, 2020[5]; OECD, 2018[6]). Higher insurance penetration has also been found to reduce the disaster recovery burden on taxpayers (Lloyd’s, 2012[7]) and the downward pressure on sovereign credit ratings (Standard & Poor’s Ratings Service, 2015[8])
However, for many types of risks, the availability of private insurance is limited. For risks that occur infrequently but result in widespread and severe impacts, such as natural hazards, cyber catastrophes, pandemics or interstate conflicts, private insurance and reinsurance markets may be unable to provide significant financial protection due to their inability to absorb large, simultaneous losses. In the context of evolving climate and environmental risks, fast-moving technological changes, and increasing geopolitical tensions and social unrest, the ability of private insurance markets to achieve broad financial protection is increasingly being tested, particularly where efforts to reduce risk have been insufficient to reduce ultimate losses.
Inadequate private insurance coverage for these risks can leave individuals, households and businesses with unprotected financial exposures that could lead to financial stress and have broader social, economic and financial consequences. Governments may need to intervene to reduce the potential for harm to society and the broader economy where a large share of individuals, households or businesses face unprotected financial exposures (ex ante) or losses (ex post).
The purpose of this chapter is to provide a framework to support an assessment of the need for government-supported financial protection and the advantages and disadvantages of the main approaches to offering government-supported financial protection (Figure 2.1). The framework is focused mainly on property risks, including risks of damage to property and contents and related businesses revenue losses, rather than personal risks for which financial protection is often provided through social insurance arrangements.
The proposed framework builds on, and complements, the G20/OECD Methodological Framework for Disaster Risk Assessment and Risk Financing (OECD, 2012[9]) by providing additional guidance to support government decisions on whether, and how, to offer government-supported financial protection. It also complements the G7 High-Level Framework for Public-Private Insurance Programmes against Natural Hazards, which provides guidance on the design of PPIPs (G7 Finance Track, 2024[10]).
2.2.1. Identifying risks of potential concern
The first step in evaluating the need for government-supported financial protection is to identify risks of potential concern. There are different types of environmental, social, technological and economic risks that can create personal, property and liability risks for individuals, households and businesses (Figure 2.2). Risks of potential concern would likely be those that are: (i) high impact, i.e. risks that could have financial impacts that would be potentially significant for an individual, household or business and lead to financial stress if unprotected; and (ii) widespread, i.e. risks that could simultaneously have a high impact on a large number of individuals, households or businesses.
The universe of potential high-impact and widespread risks that could materialise and therefore be considered as “risks of potential concern” may be quite large. National risk assessment exercises could provide a basis for focussing on risks that have a non-trivial likelihood of occurring.1 A risk with a very low frequency of occurrence could still be considered a risk of potential concern if there is a non-trivial likelihood of occurrence and a potential for very significant and widespread impacts. Figure 2.3 provides an illustration of the characteristics of risks of potential concern.
Note: For simplification, the illustration only includes “high-impact risks” (i.e. risks that could have impacts that would be significant for those affected)
2.2.2. Assessing the adequacy of financial protection
Once the set of risks of potential concern have been identified, governments should assess the adequacy of financial protection for these risks in order to identify potential unprotected financial exposures that could create financial vulnerabilities. This assessment should take into account the financial protection available through private insurance markets, as well as any protection that would be available through social insurance arrangements established for other purposes. For example, a risk that is likely to result in mostly income or health-related losses and costs might be adequately protected in countries where the government provides substantial loss of employment or health care benefits through a social insurance arrangement.
The assessment should consider whether the financial protection available to individuals, households and businesses is sufficient given their potential financial exposure. Sufficient financial protection would entail financial protection that responds to the vast majority of the potential risk materialisations (i.e. without material conditions or exclusions) with retention levels and insured limits that allow for the transfer of an amount of risk that is sufficient to mitigate financial vulnerabilities.
There are several steps for undertaking an assessment of the adequacy of financial protection (Figure 2.4).
There could be inadequate financial protection if there is a:
Lack of availability: Sufficient financial protection is not generally available (i.e. not available to most of the individuals, households or businesses exposed to the given risk), or only available to a subset of the population (i.e. only certain segments of the population have access to coverage, for example, only those with low-risk exposure).
Lack of affordability: Available financial protection is not affordable for all or a subset of the population (e.g. those facing high-risk exposure or with modest income). A premium cost that is considered “affordable” will vary across countries and across individuals, households and businesses, based on differences in income or revenue levels and differences in the cost of living and/or operating costs. While understanding affordability is critical for assessing the potential for financial vulnerabilities, there are few broadly applied definitions of insurance affordability (Box 2.1).
Lack of take-up of coverage: Financial protection may not be acquired by a significant share of individuals, households or businesses, even if that protection is broadly available, sufficient and affordable.
Some organisations have developed specific thresholds for identifying the share of households that may face unaffordable premiums. These thresholds provide examples of potential approaches to measuring affordability.
In Australia, the Actuaries Institute has developed a Home Insurance Affordability Index used to monitor trends in the affordability of home insurance in Australia. The index shows the cost of home insurance premiums in terms of the number of weeks of average gross household income and defines “affordability-stressed” households as those facing premiums that cost more than four weeks of gross household income (Paddam et al., 2024[11]).
The European Insurance and Occupational Pensions Authority has developed a dashboard on insurance protection gaps for natural catastrophes that includes estimates of the share of households that could find insurance unaffordable in the covered member countries. The estimate is derived by comparing the cost of home insurance to a measure of the difference between disposable income and the poverty line, defined as 60% of median income (EIOPA, 2025[12]). The share of households that face premium costs that are greater than the amount of their disposable income above the poverty line are considered as “finding insurance unaffordable”.
A combination of the above factors could lead to inadequate financial protection. For example, there may be inadequate financial protection for a specific risk that results from a lack of availability for some households or businesses, a lack of affordability for others, and low levels of take-up among those that have access to affordable coverage.
2.2.3. Evaluating the need for government-supported financial protection
Governments should then evaluate whether there is a rationale or need for government-supported financial protection for risks of potential concern for which there is inadequate financial protection. A need for government-supported financial protection could arise where there is a potential for significant economic, social or financial consequences due to unprotected financial exposures against risks with potentially high and widespread impacts.
Governments, and societies more broadly, will have different perspectives on the appropriate roles of governments and private markets, acceptable levels of risk and financial vulnerability, and thresholds for government intervention (Box 2.2). They will also have different perspectives on the optimal balance between solidarity, equity and individual responsibility.
While governments might consider similar factors for evaluating the need for government-supported financial protection, such as those outlined in this section, differences in social and economic characteristics and values across different countries are likely to lead to different conclusions on whether to offer government-supported financial protection to address an identified need.
Different views on the level of collective responsibility of the government for protecting households and businesses against unprotected financial exposures is likely to be an important factor. While all governments will recognise a responsibility to protect their citizens against the impacts of large-scale social, economic, technological and environmental risks, they are likely to place different levels of emphasis on the importance of individual responsibility (Jarzabkowski et al., 2023[13]). They are also likely to have differing perspectives on the balance between solidarity and moral hazard and different appetites for government intervention in insurance or financial protection markets (Jarzabkowski et al., 2023[13]).
Governments will also face different capacities to respond to unprotected financial exposures which could impact the amount of importance they place on maximising the level of insurance market protection. Some governments have greater fiscal capacity and more favourable access to debt financing and might therefore have a higher willingness to accept a level of unprotected financial exposure given their larger capacity to respond to any needs that emerge. Some governments may have a limited appetite for unprotected financial exposures, regardless of their fiscal or financing capacity.
In evaluating the need for government-supported financial protection, governments should consider the following factors linked to the nature and implications of the unprotected exposure (Figure 2.5).
Likelihood, frequency and severity of the risk: The evaluation of the need for government-supported financial protection should prioritise risks that have some or all of the following characteristics: (i) a greater likelihood of materialising; (ii) the potential to occur more frequently: (iii) the potential for more significant financial impacts on households and businesses; and/or (iv) the potential to impact a larger share of the population. A risk that could have extremely high and widespread impacts should be prioritised, even if the likelihood that it could materialise is relatively low.
Potential implications of unprotected exposures for economic activity: Unprotected financial exposures that could hinder the participation of individuals, households or businesses in economic activity likely warrant particular attention when evaluating the need for government-supported financial protection. A particular concern should be where unprotected financial exposure to a risk impedes access to credit, including mortgage loans as well as investment and working capital (OECD, 2012[9]).
Potential implications of unprotected exposures for vulnerable populations: Risks that could disproportionately impact segments of society with more limited financial capacity to absorb the potential financial impacts should also present a greater need for government-supported financial protection than risks that are mostly relevant to economic actors with more significant financial capacity and access to credit. There is likely a stronger rationale for government-provided financial protection for risks that create significant financial exposure for households, particularly modest-income households, and smaller businesses.
The evaluation should also assess the potential for expanding financial protection to address unprotected financial exposures through private insurance markets alone, including through increased investment in risk reduction. As noted earlier, unprotected financial exposures may result from a generalised lack of availability of insurance, a lack of availability for some segments of the population, a lack of affordability, or a lack of take-up of insurance.
A generalised lack of availability is more likely where the risk is not insurable by the private insurance market, indicative of a market failure. This could be driven by an inability of the insurance sector to assess the risk and quantify potential losses or, given correlated exposures, to diversify the risk across a large pool of potential policyholders. Box 2.3 provides an overview of characteristics that impact the insurability of a risk by private insurance markets.
The business model of private insurance companies is to pool assumed risks in order to capture the benefits of risk diversification across populations, regions, risks and time, and therefore lower the cost of providing financial protection. By pooling the risks of many insureds, insurance companies can provide effective financial protection with a lower amount of reserves than individuals, households or businesses would need to set aside individually to protect against the risks that they face (Vaughan and Vaughan, 2008[1]). This allows insurers to charge individual policyholders premiums that are lower than the amount that they are likely to receive in the event of a claim, and provides an incentive for individuals, households and businesses to purchase insurance rather than retain their own risk. Insurance dampens shocks that would be severe for an individual without creating large immediate costs to others whose risks have been pooled (ESRB, 2015[14]).
However, this business model is only effective for risks that are considered insurable within private insurance markets. The insurability of a given risk is often considered against a set of three main types of criteria (Berliner, 1982[15]; Hartwig and Gordon, 2020[16]; Jemli, Chtourou and Feki, 2010[17]; Schanz, 2020[18]):
actuarial criteria, which are linked to: (i) the ability of the insurer to absorb the risk given its financial capacity; (ii) the potential for the assumed risks to be accurately quantified and diversified through the creation of a large pool of independent and random risks; and (iii) the ability of the insurer to mitigate information asymmetries, moral hazard and adverse selection
market criteria, which refers to the potential for establishing a price or premium for assuming the risk that is acceptable to insureds and adequate for insurers
societal criteria, which relates to the consistency of risk transfer to insurance markets with legislation, public policy and societal values.
As a result, it is more challenging for private insurance companies to offer protection against some types of risks, including:
risks that are very likely to materialise (e.g., death for an individual in old age)
risks that are difficult to quantify, whether due to a low frequency of occurrence, limited historical experience or where the risk is constantly changing – all of which limit the ability of insurance companies to confidently estimate expected losses (e.g., catastrophic cyber attacks)
risks that could impact a large share of the insured population simultaneously (i.e. risks that are correlated and not independent) as actual losses would deviate significantly from expected losses, requiring insurers to set aside significant reserves and capital (e.g., earthquakes)
risks that involve information asymmetries likely to lead to adverse selection (e.g., loss of employment)
risks for which there is a significant gap between the perception of insurers and consumers of the amount of expected loss (e.g., natural hazards)
risks for which compensation of losses would be illegal or contrary to societal values (e.g., regulatory fines and penalties).
Where risks can be diversified internationally, the additional layer of financial protection capacity provided through international reinsurance and capital markets can mitigate some of these challenges.
A more limited gap in the availability or unaffordability of financial protection that only affects a subset of the population is likely indicative of high levels of risk exposure or limited capacity to pay for private insurance coverage. In this context, the risk itself is likely insurable overall. However, modest-income households and small businesses may not be able to afford the coverage, or insurers may not be willing to offer affordable coverage to households or businesses that are likely to face frequent and/or severe losses. Increasing investment in risk reduction should contribute to expanding the availability and affordability of insurance coverage.
A lack of take-up of insurance coverage, despite the availability of affordable insurance coverage, likely indicates that households or businesses do not perceive themselves as exposed to significant losses. Among those that are exposed, this could be driven by a lack of risk awareness or an expectation that government-supported financial protection will be available through public compensation or financial assistance arrangements.
The rationale for offering government-supported financial protection may be most compelling for risks for which there is a generalised lack of insurance availability, especially if driven by a difficult to address breach of one of the conditions of insurability and where opportunities to reduce the risk are limited. However, the potential for the private insurance market to expand the availability of coverage should be carefully considered, particularly in the case of emerging risks for which the market coverage is likely to evolve and expand.
There may also be a case for government-supported financial protection if, despite the availability of insurance in general, access to affordable insurance coverage is limited for some segments of the population. A limited gap in access to affordable insurance likely indicates that the risk is too elevated for some and that greater investment in risk reduction could support the availability of affordable insurance. It could also be driven by a lack of affordability for lower income segments of the population which could indicate a need for government-supported financial protection or other forms of government assistance.
The case for government-supported financial protection is likely more limited where affordable insurance coverage is universally available but not acquired by a share of the population. A lack of take-up of affordable insurance among those that are exposed likely indicates a lack of risk awareness or insurance literacy, or an expectation of public compensation and financial assistance. These challenges could potentially be addressed by efforts to increase risk awareness and insurance literacy and limit the expectation for government assistance.
The overall evaluation should consider the availability of financial protection for some types of losses through government-supported financial protection arrangements established for other purposes. As noted above, government-supported financial protection is likely to be available through social insurance arrangements for losses related to an increase in health care costs or a loss of employment in countries with publicly provided health care, health care insurance or unemployment insurance.
If there is a decision to offer government-supported financial protection, the government’s intervention could support financial protection by establishing some form of social insurance arrangement, a public-private insurance programme (PPIP) to offer financial protection through private insurance markets, or by providing public compensation and financial assistance to those impacted (Box 2.4).
There are three main approaches to offering government-supported financial protection: (i) social insurance arrangements; (ii) public-private insurance programmes; and (iii) public compensation and financial assistance arrangements.
1) Governments have established social insurance arrangements to provide financial protection against a range of personal risks. Beneficiaries of contributory social insurance arrangements make contributions to the scheme, usually as a component of their employment income, which is used to fund benefits.1 While practices differ across countries, contributory social insurance arrangements are most commonly applied to personal risks relevant for a broad share of the population, such as protecting individuals against loss of income due to unemployment, sickness or disability, covering the costs of health care, and supporting the adequacy of retirement income (pensions).
2) Governments have established public-private insurance programmes2 to provide financial protection for property risks and sometimes personal risks, related to natural hazards, terrorism and other catastrophe risks. Policyholders pay premiums to the programme which are used to fund claims. These programmes have generally been established to address a lack of private insurance market capacity or appetite for assuming specific catastrophe risks, although some programmes have been established to ensure broad take-up of coverage.
3) Governments have established public compensation and financial assistance arrangements to aid individuals, households or businesses impacted by the materialisation of a risk, through tax reductions or deferrals, grants, loans or guarantees. These arrangements are usually funded from general government revenues, without the payment of a contribution or premium. Public compensation and financial assistance arrangements are usually established in response to risks that affect broad segments of the population simultaneously, and for which there is limited financial protection provided by private insurance markets, including public-private insurance programmes, or through existing social insurance arrangements. They may provide financial protection for both personal and property risks. In many cases, these arrangements are established after a risk has materialised, although some countries have established multi-year or permanent arrangements that respond to risks as they materialise.
In most countries, funding allocated to social insurance arrangements tends to be much larger than the premiums collected by private insurance markets. However, the relative role of governments and private insurance markets evolve over time. For some risks, such as health and dependent old-age, private insurance markets are playing an increasing role in providing financial protection, often driven by a desire to reduce potential fiscal risks and/or enhance innovation and cost efficiency. For others, such as natural hazard risks, government-supported financial protection through public-private insurance programmes has tended to increase as rising losses and other factors have led to challenges in achieving broad coverage through private insurance markets.
Note:
1 Depending on the design of the arrangement, contributions may be used to fund the benefits of current contributors or past contributors.
2 Public Private Insurance Programmes (PPIPs) (or catastrophe risk insurance programmes) can be defined as “any type of arrangement established by the insurance sector and/or government to provide insurance, co-insurance, reinsurance and/or a government guarantee for losses resulting from catastrophe perils to all or specific types of potential policyholders” (OECD, 2021[19]). In OECD countries, PPIPs are focused on supporting the availability of insurance coverage for catastrophe perils for households and/or businesses. The programmes that have been established target natural hazard and political violence (particularly terrorism) perils, although there have been discussions, proposals and some initiatives aimed at providing coverage for losses related to cyber incidents/attacks and infectious disease outbreaks.
Governments should consider several factors when determining whether to deliver financial protection for property risks through a public-private insurance programme, or through a public compensation and financial assistance arrangement, which may be ad hoc or permanent in nature. It should be noted that the different forms of government-supported financial protection for property risks are not mutually exclusive, and that financial protection may be provided through a mix of public-private insurance and public compensation and financial assistance. Social insurance arrangements may also provide some financial protection against large-scale risks. For example, in many countries, social insurance may provide a basic level of protection for health and dependent old age risks, while private health insurance or private pension plans are available to supplement the protection provided through social insurance.
In undertaking this assessment, governments should consider the main characteristics that differentiate these two approaches.
How each approach is funded: Claims paid by a public-private insurance programme are funded by premiums paid in advance by those that will benefit from the financial protection. Public compensation and financial assistance are usually funded by general government revenues. As a result, the two approaches have different fiscal and distributional implications. Public-private insurance programmes usually involve more limited fiscal risks, as long as funding is adequate and budgetary contributions are limited, while some forms of public compensation and financial assistance are a direct fiscal cost.2 The distributional impact of public compensation and financial assistance will be equivalent to the distributional impact of the tax system, while the distributional impact of a public-private insurance programme will depend on the approach to setting premium rates. Governments usually have greater financial capacity to provide financial protection given their large balance sheet and access to bond markets which allows them to diversify risk over time. However, this greater financial capacity would theoretically be available for both forms of government-supported financial protection.3
The level of certainty for beneficiaries and discretion for government: A public-private insurance programme would usually involve an obligation to provide the full level of financial protection promised through the arrangement when a covered loss is incurred. A commitment to provide public compensation and financial assistance could potentially involve some flexibility to modify or rescind the commitment made, if necessary, particularly if the programme is temporary. The obligation to deliver financial protection inherent in a public-private insurance programme should therefore provide the policyholder with greater certainty regarding the protection that they have acquired. A public compensation and financial assistance arrangement should provide the government with greater discretion to respond to any unforeseen needs or circumstances resulting from a large event. That discretion could be leveraged to ensure a targeted response, focussing on the most severely affected, most vulnerable and/or those whose protection is deemed to be important for economic or social functioning. It could also introduce a level of “fairness” into the response that is consistent with societal values.
The participation of private (re)insurance markets: A public-private insurance programme would usually involve the insurance sector in distributing financial protection and assuming risk. The participation of the insurance sector could have implications for the cost and efficiency of delivering financial protection and the capacity to incorporate incentives to encourage risk management and risk reduction. A public compensation and financial assistance arrangement would not normally involve the private insurance sector and could have a negative impact on the take-up of any available private insurance.
Given these different characteristics, the optimal approach for delivering government-supported financial protection is likely to differ based on the specific nature and implications of the unprotected financial exposure, and the costs and benefits of insurance market participation (Figure 2.6).
2.3.1. Nature and implications of the unprotected financial exposure
The characteristics of the unprotected financial exposure, such as the potential frequency with which the exposure could materialise and the implications and distribution of the unprotected financial exposure, should be considered when determining the appropriate approach to offering government-supported financial protection
Providing financial protection against risks that are expected to materialise with a relatively higher frequency would require more regular funding. A public-private insurance programme that collects premiums from those at risk would support the availability of regular funding through the accumulation of reserves. There may also be benefits to the economy if a portion of the needed funding for recovery is pre-funded through collected premiums. The accumulated funds would be available to be invested in capital markets, providing a potential source of capital for productive investment (Pearson and Martin, 2005[12]), although investments backing property risks tend to be shorter-term in nature. Relying on debt to finance a significant portion of the recovery could increase post-event leverage and hinder the long-term recovery, whether the funds are borrowed by government to fund grant-based public compensation and financial assistance, or by individuals and businesses in accepting repayable public compensation and financial assistance.
However, accumulating reserves has opportunity costs that need to be taken into account. The accumulation of significant reserves to respond to risks that materialise with very low frequency may not be consistent with societal preferences if there are other unmet needs for government spending or investment. Accessing debt markets to spread at least a portion of the losses from very low frequency events over time may be considered fair at a societal level given the lengthy expected return period for such losses.4
Those facing unprotected financial exposures to risks that create an ex ante hindrance to their participation in economic activities or access to credit would benefit from the greater certainty of financial protection that would likely accompany a public-private insurance programme. This would help ensure that those that are exposed, and those transacting with those that are exposed, are confident that there is sufficient financial protection in place should the risk materialise. The financial protection provided by a public compensation or financial assistance programme, even if arranged ex ante, may be at risk of a change in political priorities or fiscal capacity. As a result, there may be some uncertainty over whether the financial exposure hindering economic activity or access to credit has ultimately been mitigated.
For risks that involve greater uncertainty in terms of the magnitude and distribution of losses, governments could benefit from greater discretion to respond to any unprotected financial exposure that emerges. Through public compensation and financial assistance arrangements, governments would have greater flexibility in allocating public resources to respond to unanticipated needs and to incorporate equity considerations. A public-private insurance programme with a pre-defined public resource commitment would reduce that flexibility, particularly where governments face fiscal constraints.
Risks that are most likely to impact households or businesses with limited financial capacity may be more difficult to address through a public-private insurance programme, as the programme will depend on the amount of premiums that can be collected. The reach of the financial protection may be limited if the required premium is unaffordable for modest income households or small businesses. A public compensation and financial assistance arrangement funded by the general government budget would ensure that the distributional impact of funding the fiscal response is aligned with the tax system, which will likely involve a more limited contribution from those with modest income and a higher contribution from those taxed at a higher marginal rate and who likely have a greater capacity to bear costs.5
2.3.2. Costs and benefits of insurance market participation
Offering government-supported financial protection through a public-private insurance programme would allow for the participation of the private (re)insurance market in distributing financial protection and assuming a portion of the risk. Private (re)insurance market participation would have benefits if:
The private (re)insurance market would be willing to provide some capacity: a public-private insurance programme could allow for a sharing of the risk with private insurance companies and ensure that some portion of the losses are absorbed by private insurance, reinsurance and capital markets. Such an arrangement could also enhance the availability of private insurance coverage by, for example, providing reinsurance or a guarantee for significant loss events that might otherwise impede the availability of private insurance market coverage, or by imposing a requirement to acquire insurance that could reduce adverse selection and help create a more diversified pool of risks. Offering public compensation and financial assistance, whether arranged ex ante or ex post, could discourage the purchase of insurance and reduce the share of losses absorbed by private insurance markets.
The participation of the private insurance sector could support quicker and more certain payments to beneficiaries and reduce fraud: a public-private insurance programme that leverages the insurance sector’s capacity for adjusting losses and making payments to those impacted could support a speedier recovery and lead to more limited economic disruption and lower overall losses, depending on the type of financial protection that is being provided and the commitment of the insurance sector to resolving claims fairly and quickly. Some types of financial protection could potentially be provided quickly by either the insurance sector or the government. For example, payments of fixed amounts to support immediate and basic needs or replace lost income or revenue could potentially be made quickly through a public compensation and financial assistance arrangement, or through an insurance coverage that incorporates a simplified or parametric payment trigger. The insurance sector’s expertise in detecting fraud and verifying the eligibility of claims could lead to cost benefits in terms of reducing fraudulent payments and over-payments.
The participation of the private (re)insurance sector could support risk management and risk reduction: Private (re)insurance market participation in assuming risk should incentivise insurers, reinsurers and intermediaries to develop risk assessment tools to support the underwriting and pricing of those risks. These risk assessment tools can support the government’s understanding of risk and improve the ability of governments to make effective investment in risk reduction and preparation. They could also support the application of risk-based premiums that can potentially encourage increased investment in risk reduction where attractive reductions in premium rates increase the financial benefits of investing in risk reduction.
However, the benefits of private sector participation will not be equivalent for all risks. The willingness of private (re)insurance to assume risks may be very limited while their capacity to assess and quantify risks will be lower for more complex and dynamic risks. As noted, the response to some risks could benefit from greater government discretion in allocating funds to address unanticipated needs and support an equitable recovery. In addition, the ability of risk-based premiums to encourage risk reduction will also differ for different risks.
There are also costs to including the private (re)insurance sector in distributing coverage and assuming risk, including the commissions that intermediaries, insurers and/or reinsurers would demand, the excess premium costs to account for returns to the shareholders of private (re)insurance companies, and any additional cost that could result from a multiple provider model. Ultimately, the potential benefits of private (re)insurance market participation in providing financial protection in co-operation with governments, including the potential reduction in fiscal risk, the possibility of quicker and more accurate payments and the support for risk management and risk reduction will need to be weighed against these costs. For some risks, a mix of public-private insurance and public compensation and financial assistance may be the appropriate approach.
The unprotected financial exposures that can result from large-scale social, economic, technological and environmental risks could have important social, economic and financial implications and create financial vulnerabilities for those impacted. Governments play an important role in ensuring that adequate financial protection, whether through insurance or other forms, is available to respond to these financial vulnerabilities. This chapter presented a framework for governments to support decisions on offering government-supported financial protection.
The first part provided a framework for evaluating the need for government-supported financial protection.
1. Governments should start with an exercise to identify risks of potential concern, focused on identifying risks that have a non-trivial likelihood of occurring and that could have a high-impact on a significant share of the population.
2. This should be followed by an assessment of the adequacy of financial protection for the risks identified as risks of potential concern. This assessment should examine the availability, affordability and take-up of insurance coverage for these risks, as well as the sufficiency of the coverage available in mitigating the potential financial exposures of households and businesses. The assessment should aim to identify unprotected financial exposures to the risks of potential concern and the main drivers of those unprotected financial exposures, whether a lack of availability, affordability or take-up of financial protection. It should also determine whether the unprotected financial exposures are widespread or limited to a few segments of the population, such as those at high-risk that may have opportunities to access financial protection through increased investment in risk reduction.
3. Governments should then evaluate the need to offer government-supported financial protection by considering: (i) the likelihood, frequency and severity of the risk; and (ii) the potential implications that unprotected financial exposures could have on economic activities, such as through access to credit, and on the more vulnerable segments of the population who would have a more limited ability to recover without financial protection. A key component of this evaluation should be an examination of the potential for expanding financial protection through private insurance markets and potential impediments to private insurance market involvement in assuming such risks. Ultimately, the rationale for offering financial protection will be most compelling for risks that: (i) occur more frequently and are more severe; (ii) impede economic activity and access to credit; and (iii) are considered uninsurable by private insurance markets due to challenges such as establishing a pool of uncorrelated risks or quantifying potential losses.
The second part of the framework examines the factors that are relevant for determining the appropriate form of government-supported financial protection. Governments can offer financial protection through a public-private insurance programme or a public compensation and financial assistance arrangement. The two approaches have different characteristics in terms of funding, the certainty that would be provided for beneficiaries, the amount of discretion for governments in preparing their response, and the participation of private (re)insurance markets.
Given these different characteristics, the optimal approach to offering government-supported financial protection will differ based on the nature and implications of the risk exposure on access to credit and for vulnerable segments of the population, as well as the potential contribution that private insurance markets can make to absorbing losses, providing quick payments and mitigating fraud.
Public-private insurance programmes are likely to be more suited to protecting against risks that occur more frequently and for which certainty in the availability of financial protection is important for mitigating hindrances to economic activity. This approach will be most beneficial when focused on risks for which the private (re)insurance market can make a meaningful contribution to absorbing losses, improving payment speed and accuracy, and incentivising risk management and risk reduction.
Public compensation and financial assistance arrangements are likely to be more appropriate for addressing risks that are expected to materialise very rarely and where flexibility in response could be needed based on higher levels of uncertainty about their impact. Public compensation and financial assistance arrangements could play an important role in addressing unprotected financial exposures to risks for which there is unlikely to be significant insurance market appetite or where highly exposed households and businesses are likely to face unaffordable premiums.
While these considerations should inform decisions on whether, and how, to offer government-supported financial protection, governments, and societies more broadly, ultimately have different social and economic characteristics and values which lead to differing perspectives on the appropriate roles of governments and private markets, acceptable levels of risk and financial vulnerability, and thresholds for government intervention.
References
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← 1. An OECD survey of national risk assessment practices in OECD Members found that governments commonly use a rating scale that identifies very unlikely risks as those that have an annual probability of occurrence of less than 0.05% (OECD, 2018[20]). In the United Kingdom, for example, the most recent National Risk Register focuses on risks that are deemed to have at least a 0.2% annual likelihood of occurrence although most of the risks examined are deemed to have an annual likelihood of 1% or higher (HM Government, 2025[21]). Likelihoods in the National Risk Register are presented as the probability, in percentage, that the “reasonable worst-case scenario” could occur at least once within the 5-year duration period of the risk assessment (HM Government, 2025[21]). The probabilities above have been converted to annual probabilities.
← 2. Some forms of financial assistance, including equity, loans and guarantees may not be reported in the fiscal framework.
← 3. A government could leverage its balance sheet and borrowing capacity to both provide public compensation and financial assistance and co-insure, reinsure or provide a backstop for a public-private insurance programme.
← 4. Accumulating reserves to fund the possible losses from a future event and accessing debt to fund the losses from an event that has materialised are both forms of inter-generational transfer. However, a transfer of resources to future generations for an uncertain future loss may be more difficult to implement, as the current transferors will likely have more political weight than the future recipients.
← 5. The ultimate distributional impact of a public compensation and financial assistance arrangement will also depend on the distributional impact of programme disbursements.