How community-embedded insurance can close the coverage gap

As worldwide natural catastrophes increase in frequency and severity, gaps in insurance coverage are widening. Some experts believe community-embedded insurance could help at-risk communities close this gap. 

According to a report  by the U.S. Department of the Treasury’s Federal Insurance Office, “Insurance Supervision and Regulation of Climate-Related Risks,” approximately $99 billion, or 60%, of the $165 billion in total economic losses caused by climate-related disasters in the U.S. were covered by insurance in 2022. On a global scale, the insurance protection gap is even greater. Swiss Re’s Sigma report, “Natural catastrophes and inflation in 2022: a perfect storm,” shows that global economic losses from natural disasters totaled $275 billion in 2022, and that insurance covered only 45%, or $125 billion, of the losses. 

In the first half of this year, nine weather-related disaster events impacted communities in the U.S., with each resulting in over $1 billion in damages, according to the National Centers for Environmental Information (NCEI). These nine events include severe storms, a flood and a winter storm. According to the NCEI, the annual average for natural disasters between 2018 and 2022 is 18 events, and the annual average between the years of 1980 and 2022 is about 8 natural catastrophes. 

The increasing number of natural disasters, consequent destruction and high costs pose a severe threat to low-income communities, which have limited access to traditional insurance offerings. 

“The reality is that recovery takes a really long time. It’s hard for anyone, but particularly for the lowest income community members,” said Helen Wiley, disaster preparedness program director of the nonprofit SBP (which stands for St. Bernard Project), in the virtual webinar, “Can Community-Embedded Insurance Supercharge Climate Change Resiliency in Communities?” held June 20. “We’re not talking about months, or a year or so… you’re talking about years and years, if not decades, for some of the lowest income folks to recover.” 

One of the big challenges in this space for low-income families, given such a limitation of resources, is that the delays in funding for recovery are so substantial for them, she said. 

“If you’re already really struggling to have any health insurance, getting something like disaster coverage is really difficult for you when you’re balancing all your day to day budgets,” Wiley said.

Community-embedded insurance, which is sometimes called microinsurance or community-based insurance, refers to insurance products and models that are implemented at a community level through a third party to provide coverage to low-income or marginalized individuals and communities. 

“There’s a growing body of research now that really documents the important role that insurance plays in recovery, finding that households that have insurance tend to recover better or faster,” said Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund, during the webinar. 

Kousky explained that there are three different types of community-embedded insurance models that could benefit underinsured individuals or communities in the event of a natural disaster, and while all include an intermediary organization that works with the insurer and the insured, the specific roles of the intermediary and the beneficiaries will vary. 

In one example, the intermediary may act as a facilitator of the insurance coverage for a specific group, like in employer-provided healthcare. In this case, the employer would negotiate the terms and pricing with the insurer, but the ultimate beneficiary would make the final decision with the insurer on coverage. 

Other models include when an intermediary requires coverage, such as when a landlord assigns coverage to a rental agreement, and when the intermediary is the actual insurance holder, where the intermediary may receive some money from the beneficiaries in the premium or receive funding from external sources. In the latter case, the intermediary may play a role in distributing claim payouts. 

“We also know that insurance is not a fun product for people, because nobody likes to buy things they hope to never use. It can also get confusing to make all the different choices,” Kousky said. “That’s why we have this large disaster insurance gap, and community models could help close that gap. Insurance companies are often removed from the neediest households and communities. We’re thinking about solutions for under-resourced households, and other organizations that are closer to those populations are likely in a better position to identify their specific needs and the types of solutions that might help them.”

Wiley added that microinsurance offerings, similar to community-embedded insurance products, are a significant potential solution to affordability and accessibility issues within these communities. 

“Microinsurance products are specifically tailored for low-income families, and in this wider range of communities, that involves making it possible for more microinsurance solutions to go to market long-term,” Wiley said. “It’s going to be so important to address at least some of the affordability challenge for low-income households.”

Charlie Sidoti, executive director of the nonprofit InnSure, said in an interview with Digital Insurance, “Some of the brokers have capabilities to go into a city and quantify that the protection gap in one part of the city is much higher than other parts… I think that needs to be more technology-enabled and more scalable, because to really figure out where you want to deploy community-embedded insurance, you need to identify the parts of the community that are most at-risk and have the most inability to afford insurance, and then provide that thin layer that supports them to a minimum level so that the community can respond. And that requires each community knowing exactly where the protection gap is.”

Sidoti reported that InnSure is actively working to close the protection gap through its insurance initiative, which supports parametric startups, hosts educational webinars and researches the tools and information to provide to communities in need of insurance protection.

“Communities need scalable, digital tools that they can use to fairly quickly and cost-effectively identify where the protection gap is so that they can plan,” said Sidoti. “And it would be planning insurance, but it could also be planning other infrastructure like sea walls, drainage and disaster mitigating features like that.”

Technology-enabled data aggregation and risk analysis is another way the industry can help provide information and education to low-resource communities, according to InnSure.

“There’s a lot of opportunity for innovation around decision-support analytics that helps both the individual asset owners, including commercial homeowners, but also the community planners and policymakers who are thinking about insurance as part of their solution, to better understand the economics of and the trade-offs between different investment options,” Sidoti said. “Better tools could help them to optimize investments into mitigation, risk transfer through insurance and direct funding of loss costs through disaster relief over long term horizons.”

“These challenges are also moving targets as the climate changes, as there is development in the community and as inflation affects repair costs and replacement costs of assets in the community,” he said.