The climate adaptation imperative: tackling the protection gap for climate insurance
Find out how insurance-linked securities and targeted private equity investments are helping to increase insurance coverage related to natural catastrophes and extreme weather events, and so to provide economic protection for millions of people.
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Within the broader investment landscape of climate solutions, ’climate adaptation’ – that is, activities that help to adjust or improve capacity to cope with evolving climate impacts – is increasingly seen as a critical priority. This is being driven by the increased prevalence of extreme weather-related events, as well as recognition of longer-term changes, such as changing precipitation patterns.
Last year’s COP (COP29) saw progress on climate adaptation, including the advancement of a Global Goal on Adaptation and further impetus and support for countries, including developing economies, to create National Adaptation Plans. Currently, around 87% of countries do not have a least one national-level adaptation policy, strategy or plan.
Financing for climate adaptation and resilience projects reached $76 billion a year in 2022, largely accounted for by government programmes with the private sector financing less than 3% of adaptation activities. However, there is a pronounced adaptation financing gap, with an estimated need for developing economies alone of $212 billion per year from 2024-2030.
We believe there is increased interest in this theme from the private sector, likely due to the prevalence and materialisation of climate risk, indications of policy incentives, and rising investor awareness, prompted in part by increased focus on the topic in the financial press (for example, the FT’s climate insurance series, ‘The uninsurable world’). Our 2024 Global Investor Insights Survey found that climate adaptation was the top theme for those targeting sustainability and impact within their private markets allocation.
Investors targeting sustainability and impact prioritise climate adaptation
Source: Schroders Global Investor Insights Survey 2024. Q: What investment themes are you seeking to allocate to via sustainability and impact strategies in private markets in the next 1-2 years? Select all that apply.
At Schroders Capital, we see numerous opportunities within climate adaptation. In this article we focus on two specific areas across insurance-linked securities and growth private equity, both of which focus on improving the so-called ‘protection gap’ for insurance coverage related to natural catastrophes and extreme weather events. We define natural catastrophes as large-scale events resulting from natural processes or hazards that cause significant destruction, loss of life or damage to property. This can include the likes of hurricanes and earthquakes, as well as so-called secondary perils such as floods, wildfires and landslides. Natural hazard insurance typically covers damage to properties and belongings as well as specific sector insurance, for example covering agriculture and crops.
Climate insurance and tackling the ‘protection gap’
Within climate adaptation, climate ‘resilience’ – the ability of a system, community or individual to anticipate, prepare, respond and recover from climate impacts and shocks – is critical. Insurance plays a vital role in supporting vulnerable communities to respond to these impacts, and can enhance the ease and pace at which recovery takes place.
The frequency and intensity of many types of extreme weather events have been increasing. The WTW Natural Catastrophe Review 2024 estimates that the insurance ‘protection gap’ for natural catastrophes is around 60%. According to Swiss Re, global insured losses from natural catastrophes and extreme weather events reached around $140 billion in 2024, for the fifth consecutive year exceeding $100 billion, with total economic damages exceeding $320 billion.
Global natural catastrophe insured and uninsured losses
Source: Swiss Re, 2025.
The ‘protection gap’ is commonly defined as the discrepancy between the potential financial loss for people or economies and the amount of insurance coverage to mitigate those losses. The gap can exist across numerous types of insurance, life, health, property and natural disasters. A protection gap can be caused by numerous factors, including lack of awareness, affordability or lack of access. An increasing or new exposure to natural hazards can create or widen existing protection gaps further.
Generally, we can consider two markets, based on the maturity of the insurance offering:
- Less-well developed insurance markets: Characterised by a lack of local insurance infrastructure and no access to the global reinsurance market. Reasons for underdevelopment could be a lack of developed financial services sector, low individual insured values and, depending on the territory, lack of risk-assessment capability for specific perils.
- Well-developed insurance markets: Even in well-developed economies, a substantial protection gap persists. In the US for example, the protection gap for the 10 years from 2015-2024 was $571 billion, 43% of total economic losses from natural catastrophes. Reasons for the protection gap can be underinsurance due to lack of awareness or affordability, increasing exposure to hazards and/or misperception of government assistance.
There are also many parts of the world, particularly in Asia, Latin America, and North Africa, which fall in between these categories and where, despite the presence of local insurance infrastructure and access to reinsurance, penetration of climate insurance products remains low.
How insurance-linked securities tackle the protection gap
Insurance-linked securities (ILS) are investments that enable the transfer of insurance risk from the (re)insurance industry to capital market investors, in return for a risk transfer premium that provides a stable and uncorrelated yield-based return (find out more here). The size of the ILS market today is approximately $115 billion – and it is likely to continue to grow to support the insurance industry and against the backdrop of the growing protection gap.
Certain ILS transactions have been launched to address exposures in less well-developed insurance markets. Specifically, several transactions have been brought to market sponsored by entities such as World Bank and Danish Red Cross, in contrast to more traditional ILS bonds that are sponsored by insurance companies. Total amount of cover provided has been modest to date, but many further transactions are expected in the future.
Overall, however, one could argue that all ILS transactions, even in developed markets, help to address the protection gap. Indeed, it was the occurrence of Hurricane Andrew in 1992 and the uninsured losses that followed that the ILS market was ‘invented’ as an additional source of risk-bearing capital to supplement the reinsurance market. There are largely two kinds of sponsors in the US: standard insurance or reinsurance companies, and quasi-government entities created to offer last resort protection, where the private insurance market is unable to offer sufficient cover.
When we consider the protection gap not just as a % difference between insured and uninsured losses but also as the total dollar loss amount, we not only need to consider the increased frequency and severity of weather events but also the increase in economic exposure within vulnerable areas. This is particularly prevalent within developed markets, in coastal regions and areas prone to flooding. This is contributing to the increase in overall losses from natural catastrophe, with a projected trend of 5-7% annual growth.
Example ILS transactions (2023-2025) tackling different protection gap drivers
Transaction 1: Less-well developed economy IBRD – Chile 2023 Protection buyer: Republic of Chile Peril covered: Chile earthquake Size: $350m Date of issue: Mar 2023 An earthquake catastrophe bond that provides disaster insurance to the Republic of Chile, issued through the World Bank’s International Bank for Reconstruction and Development (IBRD). Chile uses this protection to help counter the effect that a damaging earthquake could have on its economy and to secure disaster risk financing. As an additional feature, the proceeds from the sale of the notes to ILS investors were used by the IBRD to fund sustainable development projects in member countries, while it entered into an insurance agreement with Chile to make the payouts on the occurrence of any qualifying quakes. The IBRD – Chile 2023 catastrophe bond notes can be triggered to make a 30%, 70% or 100% payout of principal, dependent on quake depth, magnitude and location. It’s a type of parametric “quake in a box” trigger, with several defined geographic boxes running the length of Chile. The boxes also extend into neighbouring countries so that a major quake on Chile’s borders, or off the coast that could cause a tsunami, are captured. |
Transaction 2: Well developed economy – last resort protection Everglades Re II Ltd. (Series 2025-1) Protection buyer: Florida Citizens Property Insurance Corporation Peril covered: Florida named storm Size: $1.525bn Date of issue: May 2025 Florida’s Citizens Property Insurance Corporation is a not-for-profit insurer of last resort designed to provide insurance for homeowners who can’t obtain cover from the private insurance market. It relies on support from the traditional reinsurance and ILS markets in order to be able to offer insurance policies to homeowners in Florida. Without this it would not have the capital to be able to offer the cover that it does. The ILS market steps up to provide capacity each time this sponsor comes to market. The issuance size makes it one of the biggest individual issuances. |
Transaction 3: Well developed economy – standard insurer protection Palm Re Ltd. (Series 2025-1): Protection buyer: Florida Peninsula Insurance Peril covered: Florida named storm Size: $250m Date of issue: Apr 2025 Florida Peninsula Insurance Company, a specialist property underwriter in the state, obtained protection for itself and its subsidiaries, Edison Insurance Company and the Ovation Home Insurance Exchange, with this catastrophe bond. This is a typical example of the way that private insurers access the ILS market to obtain protection that enables them to continue to sell insurance policies in their region, in this case Florida. |
How private equity can create climate insurance impact
As noted above, climate adaptation and resilience remains largely untapped by most private investors but, with rising demand for solutions related to the increase in extreme weather events and longer-term climate changes, increased opportunities are coming to market.
Within private equity, broadly two types of opportunities exist: early-stage investments into pure-play companies focused on specific climate adaptation solutions and technologies, or buyout and growth investments for large diversified players. Opportunities will also vary considerably by geography, given the level of funding, existing resilience, underappreciation of climate risks and localised nature of climate impacts.
Understanding climate risk remains a critical first step to improving resilience against extreme weather events, and can be achieved by improving the climate data, analytics and modelling available. Areas with less climate data collection and modelling can be one reason for a market becoming underserved by insurance. For example, within Africa, where the protection gap is persistently high with insurance penetration typically below 1%, the climate intelligence market is expected to grow by around 15% per annum over the next five years6.
Emerging and less-developed markets have the dual problem of higher proportion of losses being uninsured (protection gap), and these countries being generally considered to be bearing the brunt of climate change impacts. Whilst large losses from natural catastrophes occur in developed markets, the overall impact to societies can be smaller.
Our private equity climate insurance and resilience impact strategy within BlueOrchard addresses the protection gap specifically by investing in companies that provide solutions across the insurance sector value chain, including insurance companies, insurance technology (insurtech), and financial intermediaries. As of March 2025, the strategy had invested more than $120 million across 32 countries, benefitting more than 70 million people with a particular focus on poor and vulnerable communities in emerging economies. Our strategy is commonly labelled as ‘growth equity’, referring to investments in companies that already have proven commercial viability but need capital to scale and achieve adequate returns on invested capital.
Example companies across the climate insurance value chain
Expanding climate intelligence through improved climate analytics and modelling: Reask: a natural catastrophe modeller, supports entities such as the World Bank and The Pacific Catastrophe Risk Insurance Company Trust on providing data necessary for designing parametric insurance products – resulting in swift payments to up to 10m people covered. Also became the official calculation agent from Tropical Cyclone Rae, hitting Fiji in February 2025. The efficiency of their technology enabled payout execution only eight days after the cyclone for the restoration of vital coral reef and community livelihood support. Targeting 2.8m beneficiaries by 2030. |
Integrating climate insurance solutions into existing financial products: FinAGG: a digital financing solution for MSMEs in India, offering competitive cashflow financing alongside business insurance coverage to protect enterprises against natural disasters such as floods and earthquakes. Targeting 1.1m beneficiaries Fido: a digital services platform operating in Africa, providing instant credit to underserved individuals and MSMEs. Utilising AI, it facilitates access to financial services previously unavailable, incorporating insurance, specifically climate-related risks, into its lending products. Targeting 1.5m beneficiaries by 2028. |
Integrated analytics and insurance to achieve sector-specific resiliency: Pula: an agri-insurtech pioneer in Africa utilising artificial intelligence and mobile-based systems to provide agricultural insurance to smallholder farmers across emerging markets. Using a 100+ partner network, insurance is bundled with essential products, such as seeds and credit, to increase the accessibility for the 80% of smallholder farmers in Africa who lack formal insurance. Pula have managed to scale to insure over 20m farmers worldwide through a type of insurance, known as Area Yield Index. Targeting 68m beneficiaries by 2028. |
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