The world is entering an era where disasters can cause financial damage on a scale that traditional insurance systems struggle to manage. A recent report from the Organisation for Economic Co-operation and Development (OECD) highlights how natural disasters, cyber attacks and pandemics are becoming more complex and costly, raising urgent questions about how societies protect themselves financially. The study, prepared by the OECD Directorate for Financial and Enterprise Affairs through its Capital Markets and Financial Institutions Division, with contributions from the OECD Working Party on Insurance and Pensions and the OECD High-Level Advisory Board for the Financial Management of Catastrophic Risks, examines how governments and insurance markets can work together to strengthen financial resilience.
The report explains that individuals, households and businesses are exposed to many different risks that can suddenly create large financial losses. When disasters occur, homes may be destroyed, businesses may shut down and economic activity can be disrupted for long periods. The costs of rebuilding property, replacing equipment and recovering lost income can be overwhelming, especially for small businesses and families with limited savings. Insurance has traditionally helped absorb these shocks by spreading risk across large numbers of policyholders, but modern disasters are placing increasing pressure on this system.
Why Insurance Alone Is Not Enough
Insurance markets remain a key tool for managing risk, yet they cannot always provide full protection against large-scale catastrophes. Some disasters are extremely costly and can affect thousands or even millions of people at the same time. When losses become too large or unpredictable, insurers may raise premiums, limit coverage or withdraw from certain markets altogether.
This situation creates what experts call a “protection gap,” where the total economic damage from disasters is much larger than the amount covered by insurance. In many countries, a significant portion of disaster losses remains uninsured, leaving governments and taxpayers to fund recovery efforts. The OECD report warns that this gap is likely to grow as climate change increases the severity of weather events and as new risks such as cyber attacks emerge.
The Role Governments Can Play
To address these challenges, the OECD suggests that governments take a more structured approach to disaster-related financial protection. The report proposes that policymakers first identify risks that could cause widespread economic damage. After identifying these threats, governments should evaluate whether people have enough financial protection through insurance or other systems.
When gaps appear, governments can step in through two main approaches. One option is public-private insurance programmes, where governments partner with insurance companies to provide coverage for risks that private markets cannot handle alone. In these programmes, insurers continue to sell policies and manage claims, while governments provide financial support or guarantees that help absorb extremely large losses.
The second approach involves public compensation and financial assistance schemes funded directly by government budgets. These programmes can include grants, tax relief or emergency loans provided to households and businesses after disasters occur. Each approach has advantages, and the best choice depends on the type of risk involved.
Natural Disasters Are Becoming More Costly
Natural hazards remain the largest source of catastrophic losses worldwide. Events such as floods, storms, earthquakes and wildfires cause billions of dollars in damage each year. Climate change is making many of these events more frequent and severe, which increases both economic losses and insurance costs.
Wildfires have become a particularly serious challenge in several countries. Expansion of housing into fire-prone areas combined with hotter and drier weather has increased wildfire damage significantly in recent years. As losses rise, insurers in some regions are raising premiums sharply or reducing coverage for high-risk properties. Some governments have introduced special insurance pools to ensure homeowners can still obtain coverage, but these solutions often provide only limited protection.
Flooding is another major problem. Despite being one of the most common natural disasters, flood insurance remains relatively low in many countries. To close this gap, several governments have created flood insurance programmes that combine public support with private insurance markets. These programmes aim to make coverage more widely available while reducing the financial burden on governments after disasters.
Preparing for New Types of Risks
The report also highlights newer threats such as cyber attacks and pandemics. Cyber incidents are increasing as businesses rely more heavily on digital systems. Large cyber events can disrupt multiple companies at once, causing widespread economic losses. While cyber insurance markets are developing, coverage remains limited for major systemic attacks.
The COVID-19 pandemic revealed similar weaknesses in financial protection systems. Businesses around the world faced massive revenue losses when lockdowns disrupted economic activity, yet insurance coverage for pandemic-related business interruption was largely unavailable. This experience has prompted governments and insurers to consider new ways of sharing risks in the future.
The OECD concludes that improving financial protection against catastrophic risks requires cooperation between governments, insurers and communities. Better risk assessment, stronger disaster prevention measures and more inclusive insurance systems will all play a role. As global risks continue to grow, ensuring that societies can recover quickly from disasters is becoming a critical economic priority.