Individuals, households and businesses are exposed to a broad range of social, economic, technological and environmental risks throughout their lifetimes that can have significant financial consequences should they materialise. Access to insurance can play a critical role in protecting them from potentially devastating financial losses, providing a secure source of funding to support recovery. However, private insurance and reinsurance markets may be unable to provide significant financial protection for some types of risks that occur infrequently but result in severe and widespread impacts, such as natural hazards, cyber catastrophes or pandemics. For some of these risks, public-private insurance programmes can provide a means to support the availability of affordable insurance and address unprotected financial exposures.
Governments should evaluate the need for government-supported financial protection to respond to large-scale catastrophes
Governments play an important role in ensuring that adequate financial protection is available to respond to catastrophic risks. They can support the availability of insurance coverage by establishing public-private insurance programmes or develop public compensation and financial assistance arrangements to respond to unprotected financial exposures. Governments should identify risks that could have a high impact on a significant share of the population, and assess the adequacy of financial protection for those risks and the potential implications that unprotected financial exposures could have on economic activities, such as through access to credit.
Public-private insurance programmes are likely to be a better approach to responding to more frequent risks and to unprotected financial exposures that could impede economic activity
Government-supported financial protection can be offered 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. Public-private insurance programmes are likely to be more suited to protecting against risks that occur more frequently and where the certainty of an insurance obligation is important for mitigating hindrances to economic activity. 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-private insurance programmes that leverage insurance market capacity and risk reduction expertise may be better placed to address unprotected financial exposure to natural hazard and cyber risks
Natural hazards, cyber attacks and incidents and infectious disease outbreaks can all result in material impacts for a significant share of the population. Some past events have led to economic losses in the hundreds of billions of US dollars. Important gaps in the adequacy of financial protection for these risks increase the likelihood that they could lead to unprotected financial exposures. The rationale for offering some form of government-supported financial protection is likely to be higher for the natural hazard risks that occur with greater frequency and are more likely to affect access to credit. There may also be a rationale for offering government-supported financial protection for cyber risks, given the increasing impact of unprotected cyber exposures on contractual relationships, and the potential that government support could mitigate a substantial impediment to the availability of insurance coverage.
Public-private insurance programmes may be more appropriate for addressing risks, such as natural hazards, that would lead to more frequent funding demands, where certainty of financial protection is necessary for those exposed, and where the insurance sector can potentially contribute to assuming losses. The insurance sector could help with speedier payments, fraud reduction, and in encouraging risk management and risk reduction. The insurance sector also has greater appetite and capacity to assume natural hazard and cyber risks and has contributed to risk reduction for both risks. Insurance and reinsurance markets have more limited appetite for providing coverage for the revenue losses related to major infectious disease outbreaks and fewer opportunities to incentivise risk reduction.
Addressing increasing wildfire losses requires increasing investment in wildfire risk reduction to maintain the availability of insurance coverage
Governments have had more limited involvement in supporting the availability of insurance for wildfire risk. Insurance in countries with high levels of property insurance take-up has generally absorbed a significant share of past losses. However, increasing wildfire risks, driven by development in the wildland-urban interface and weather conditions more conducive to fire ignition and spread, have led to a dramatic increase in wildfire losses in the last decade. In OECD Member and accession countries, average annual economic losses from damaging wildfires were almost five times higher in 2015-2024, relative to 2000-2014. The increasing losses are impacting the availability of affordable insurance in some wildfire-exposed countries, including Australia, Canada and the United States.
Some highly exposed jurisdictions have taken steps to enhance the availability of property insurance coverage. In many wildfire-prone US states, residual insurance arrangements have provided an increasing share of the coverage for high-risk households and businesses, although the coverage provided is usually limited and expensive. Significant demand for coverage has led to insurance sector innovation in risk assessment and product design that has expanded availability for lower risk policyholders in high-risk regions. Increasing investment in risk reduction and adaptation is the most sustainable approach to improving long-term affordability. Risk-based premiums, although not consistently applied in all high-risk countries, can provide incentives for household and business investment in risk reduction.
Public-private insurance programmes that provide coverage for flood risk can support broad coverage, reduce overall public sector exposure and support risk reduction
Increasing flood hazard in the context of changing precipitation patterns and continued development in areas exposed to flooding has led to an increase in losses from floods. However, the share of flood losses insured is below 30% in more than half of OECD Member and accession candidate countries. Public-private insurance programmes that provide coverage for flood risk are increasingly being established and have supported the availability, affordability and take-up of flood insurance coverage. These programmes have led to broader coverage of flood losses and contributed to reducing overall public sector exposure to flood risk and supporting risk reduction and adaptation.
Countries have taken different approaches to the design of flood risk insurance programmes, in terms of covered hazards, eligible insureds, type of compensation or (re)insurance provided, role of the programme in the market, approach to premium pricing, and the role of government in providing financial support and oversight. While these different approaches can all be effective in addressing protection gaps in flood insurance, the different approaches to programme design can have differing impacts on the level of coverage ultimately achieved, the potential risks for public finances and the contribution of the programme to encouraging risk reduction.