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Moody’s says insurance-linked securities can help close protection gap

Moody’s estimates about 84% of US earthquake exposure is uninsured, one of the largest protection gaps for natural catastrophe perils.

Reported · Written up by our desk · Reinsurance

Artemis, citing analysis from Moody’s, said rising severity and frequency of natural catastrophe events are keeping the global protection gap in focus, and the rating agency argues that scaling capital markets and using insurance-linked securities could help narrow it.

The report says property and casualty insurers and reinsurers cannot close the gap on their own because they must charge enough premium to pay claims, comply with regulatory capital requirements, and still generate returns for shareholders, which limits how much correlated catastrophe risk they can safely underwrite.

Moody’s also highlights differences across perils, noting that high-tail-risk events such as earthquakes tend to leave the widest gaps, with about 84% of US earthquake exposure uninsured because coverage is often optional, costly, or seen as unnecessary.

Artemis added that because insurers cannot fully absorb correlated tail risk, they rely on the reinsurance market, and Moody’s points to insurance-linked securities, including catastrophe bonds and sidecars, as a way for capital markets investors to participate in catastrophe returns and risks, while also stressing that ILS remains a small share of catastrophe capital.

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