Each year, natural disasters cause losses that insurance does not cover. In 2025, a record share of 49% of economic losses was covered by insurance, of which natural catastrophes caused USD 107 billion out of USD 220 billion in total. Still, more than half of economic losses remained uncovered. The instruments developed to close that gap are increasingly sophisticated: parametric triggers, resilience-linked pricing, ecosystem-based policies. But the gap between what a financial product can do and what resilience actually requires is not measured in premium volume. It is measured in the labour, community trust, and institutional capacity that must exist before any instrument can function.
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The costs of building resilience
Financial instruments can create the incentives necessary for the work and time that are needed to build resilience against natural risks and disasters. Community wildfire programmes in the United States offer an example in which insurer interests and community risk-reduction have been deliberately aligned.
The National Fire Protection Association runs a recognition programme called Firewise USA. Communities that obtain the designation commit to reducing fuel loads around structures, meeting construction standards, and undertaking annual outreach and risk-reduction work. Nearly 3,000 communities are now Firewise-recognised. Insurers have taken notice: membership can qualify households for premium discounts, and the industry has actively promoted the programme because it reduces aggregate exposure. Leigh Johnson, an Associate Professor of Geography and Environmental Studies at the University of Oregon, who researches wildfire insurance in her state describes how the NFPA encourages certification, and insurers reinforce it: “the insurers have a huge role in trying to move this forward because it reduces their total exposure to risk.”
But the work is not symmetrical with the reward. “The discount you get on your premium is relatively small,” Johnson notes, “and the amount of work required to really mobilize a community around doing all of these things is pretty large.” Certification therefore tends to concentrate among higher-income communities with the resources and time to invest in such a process. The communities most exposed to wildfire risk and least able to afford rising premiums are frequently not the ones accumulating the social capital needed to meet certification requirements. While the market that is created can reward a Firewise designation; it cannot, on its own, fund the years of community organising that produce one. Resilience is built, therefore, not only through capital, but by labour and time sustained over years, much of it uncompensated.
Embedding insurance instruments
Given the labour that resilience requires, an instrument is likely to be more effective when it is built in close cooperation with the community living in the place where the risk falls. Michelle Harangody, Assistant Specialist at the Center for Pacific Islands Studies at the University of Hawai’i at Mānoa, has examined the lack of such design in the case of coral reef insurance. In 2022, Hawai’i became the first US state to adopt a parametric coral reef insurance policy, modelled on a scheme developed in Quintana Roo, Mexico. There, close collaboration between local communities, government, and conservation organisations had made the instrument viable. The Hawai’i policy provides payouts of up to USD 2 million when tropical storm winds exceed 50 knots near covered reefs, but has not been triggered since its launch. Harangody’s research shows that while the mechanism replicated the financial structure, the community and institutional conditions that made it work in Mexico were not transferred with it.
The first issue is who controls the payout. In Hawai’i, the state controls the first three nautical miles offshore, and reefs in those waters are held in trust by the state for the benefit of present and future residents. State law commits the agencies managing those reefs to act in the public interest. The insurance policy, however, names a private loss payee: it is the Nature Conservancy, not the state, that receives the payout when the trigger is met, and that decides how the funds are spent on a resource the state is legally obligated to steward. This is the tension Harangody identifies, and it is not one that better calibration of the parametric trigger could resolve. As she puts it: “insurance, parametric or other, that has a private loss payee for a public trust resource is problematic.”
In this case, the decisions about how a public resource is restored, which sites are prioritised, which methods are used, who is consulted, end up being made by an organisation that is not accountable to the residents whose reef it is. Most strikingly, when Harangody spoke to people whose coastlines the policy was designed to protect, almost none had heard of it: “When I was talking to people about this research, so many of them did not know what reef insurance was. Nobody had any idea. And I felt that was really startling, because these reefs are for the people I was talking to.” A financial product that operates without the knowledge of the community it nominally serves cannot easily be said to be accountable to that community.
The labour question compounds this. Coral reef restoration in Hawai’i is highly regulated; permits require scientific oversight, and the practitioners doing the work are concentrated in a handful of nonprofits and university programmes. The insurance payout covers some materials and logistical costs, but the organising work that makes a payout meaningful, such as building a statewide restoration response network, training divers, coordinating across agencies, is not covered by the policy. Harangody describes what this means: “this type of policy relies on certain types of labour that are either unpaid or paid in terms of the type of service that you do for your work, but it isn’t explicitly covered in this type of financial mechanism.” The resilience that makes the instrument viable is being produced by practitioners whose time the instrument does not compensate.
Beneath all of this sits a public-funding problem the insurance policy cannot reach. The Division of Aquatic Resources, the state agency responsible for reef management, is chronically underfunded. An instrument layered on top of an underfunded public system does not substitute for that funding; it reorganises authority over a public resource without addressing the underlying resource constraint.
Changing behaviours and institutions
Even when a financial instrument is designed in cooperation with the affected community and relevant stakeholders, its effectiveness often depends on the institutions delivering it. Extending institutional mandates and shifting professional cultures can play an important role in this. Addressing such change means for insurers and public institutions to invest in the conditions that would make coverage viable in the first place.
One point highlighted by multiple experts is access. Pranav Prashad, Technical Expert on Social Finance and Impact Insurance at the International Labour Organization, describes how communities rarely seek out insurance on their own. As he puts it: “nobody wakes up thinking: today is the day to buy insurance. Awareness and uptake depend on trusted local intermediaries, community leaders, aggregators, civil society organisations, who can translate abstract risk products into the language of daily life.” The ILO’s work in India offers a smaller-scale example of what community embeddedness can look like in practice. “Local partners trained a cadre of women community agents, known as Krishi Sakhi and Bima Sakhi, friends of agriculture and friends of insurance, to communicate risk and insurance products directly to rural households, as well as create awareness about government supported programmes. Because they were trusted members of those communities, they could reach people and have conversations that formal insurers could not.”
It may also take a significant shift in culture for instruments to work effectively. Jaroslav Mysiak, principal scientist at the Euro-Mediterranean Center on Climate Change and coordinator of the NATURANCE project, runs nine Innovation Labs across Europe that test how nature-based interventions can be integrated into insurance design. One of the Innovation Labs worked with Italy’s Water Reclamation Boards (Consorzi di Bonifica), which are traditional institutions going back to the beginning of the 20th century. Theywere originally set up to drain land and supply irrigation water; informally, however, they are increasingly being asked to do more. As Mysiak puts it: “There is a wide perception that the Land Reclamation Boards could take on another function as environmental stewards in Italy, taking care of ecosystem connections in the land they are managing, but this is not in their mandate.” The Lab investigated whether insurance could support the boards in playing that role, by covering the financial risks they would assume if they began implementing controlled flooding on low-value land to protect higher-value downstream urban areas. The financial logic worked. The constraint was elsewhere. What was needed, Mysiak found, was a cultural change inside the boards themselves: a shift from a strictly utilitarian self-conception towards one in which environmental stewardship is part of the core function. “Theoretically the scheme can work and would work perfectly, but what it requires is a shift from the traditional perception of what the water board is about, towards a new model that is better serving society today.”
The conditions for coverage
Three arguments emerge from these cases, none of which an insurance product can settle on its own. Resilience is costly in both labour and time. It should be built in tandem with the community where the risk falls. And the institutions on which it depends usually have to change in mandate, in funding, or in culture, to absorb the role an insuranceproduct asks of them. Where these conditions hold, financial instruments can do what they were designed to do. Where they do not, the instrument either fails or produces consequences its designers did not intend.
Johnson, reflecting on this pattern, points to something it implies about the protection gap itself. The framing of a “gap” carries a built-in answer: more insurance to fill it. That framing forecloses other possibilities. As she puts it: “the kinds of responses that become harder to pursue are things that can happen at community levels, requiring some coordination, buy-in from local authorities, pulling together and marshalling resources. Once insurance becomes the primary answer, particularly in low-income contexts with relatively little presence of finance or risk-mitigating civil society, those alternatives are not going to percolate up afterwards.”
Building those alternatives is slow and expensive work, and the protection gap will not be closed by financial innovation alone. It can be mitigated by the combination of innovation with the work of building the institutional foundations that make coverage meaningful. The question for investors, insurers, and policymakers is not only which instruments to deploy, but what they are willing to invest in before the instruments can work.
