The International Association of Insurance Supervisors (IAIS) has published a report on the role of insurance supervisors in addressing natural catastrophe (NatCat) protection gaps, which are the uninsured portion of economic losses caused by natural disasters. The report outlines why addressing NatCat protection gaps matters and presents a range of supervisory actions to address challenges related to affordability, availability and take-up of insurance coverage against NatCat events.

The report identifies five major areas of supervisory activity that can help narrow NatCat protection gaps, underpinned by current examples from IAIS member jurisdictions. These are:

• Assessing insurance protection gaps – the collecting and sharing of data, promoting the understanding and development of NatCat models, and conducting stress testing and scenario analysis.
• Improving financial literacy and risk awareness – ensuring consumers are informed through supervisory initiatives, and imposing requirements on insurers to provide clear information on risks and coverage. The Central Bank of Ireland’s initiative in response to the risk of underinsurance in the home insurance market is cited by the IAIS in this part of the report.
• Incentivising risk prevention and reduction of insured losses – raising awareness on the benefits of risk prevention, implementing supervisory measures to incentivise transparent risk-based pricing, and coordinating with public entities to align risk prevention measures.
• Creating an enabling regulatory and supervisory environment – to support availability of insurance and uptake of coverage, including the development of innovative insurance products, such as parametric insurance, as well as supporting measures to enhance the availability and take-up of NatCat insurance coverage, such as mandatory offerings or automatic inclusions, enabling access to global reinsurance, and catastrophe bonds.
• Advising government and industry – emphasising the value of insurance to the economy and society and contributing to the design and implementation of insurance programmes or public-private partnerships (PPPs) that can provide broad-based insurance coverage or offer new products for NatCat events.

Echoing the recent joint ECB and EIOPA discussion paper (summarised in my previous article), the IAIS mentions that one of the tools that supervisors can support is the use of catastrophe bonds (cat bonds), which are a type of insurance-linked security (ILS) used to support reinsurance capacity and respond to NatCat events. Cat bonds can be used by insurers to transfer NatCat risk to capital markets investors, as well as to help insurers provide capital in a timely manner to households, businesses and governments for the purposes of disaster relief and recovery. The report highlights that several jurisdictions have created a regulatory framework for ILS to facilitate the issuance of cat bonds and provide an additional risk transfer option for insurers. From an EU perspective, the Central Bank of Ireland has extensive experience in authorising ILS special purpose vehicles and cat bond issuances.

The IAIS report argues that actions to address NatCat protection gaps can support multiple insurance supervisory objectives, such as financial stability, policyholder protection, financial inclusion and market development. The IAIS emphasises that supervisors can play an important role by contributing expertise, tools and experience to this collective effort, across both the public and private sector, to enhance resilience against NatCat events and narrow protection gaps. The report also recognises that addressing protection gaps is a broad societal challenge that requires a coordinated response from a range of parties, including governments, the insurance industry, and consumers.

The aim of the IAIS report is to provide a basis for engagement and to stimulate discussion among insurance supervisors and other relevant stakeholders on measures to address protection gaps, and to serve as a platform for future work on other types of protection gaps.