In this series, the Gallagher Research Centre (GRC) talks to academics and innovators whose work has had a profound impact on the reinsurance industry.
Paula Jarzabkowski

On the eve of launching her new co-authored book, Disaster Insurance Reimagined, the GRC caught up with public-private initiative expert Professor Paula Jarzabkowski on the societal role of protection gap entities (PGEs). Alongside Gallagher Re’s Antoine Bavandi (Head of Public Sector & Climate Resilience Solutions), discussion centred on the increasing impact of secondary perils, how too much knowledge of risk can lead to uninsured markets and the role of institutional donors in helping develop a common language around disaster risk.

You’ve been researching many different types of public-private initiatives (also termed protection gap entities or PGEs) for a long time. What are the main challenges that PGEs face and how have they evolved over time?

Paula Jarzabkowski: It’s important to acknowledge that PGEs come from a variety of different origins. It’s actually for that reason that the term PGE is purposely used, rather than calling them public-private initiatives. We do this to acknowledge that not all PGEs are public-private initiatives. Many are public, many also came from the private sector, but ultimately, they’re all fulfilling a protection gap.

PGEs came about to address local problems (e.g. earthquake risk in California1 or New Zealand2, windstorm in the Caribbean3). But while their original focus was on addressing a specific local concern, what drove us to write the book is the opportunity for collective learning from these different PGEs — something that hadn’t really happened before. So, while PGEs weren’t intended to close the global protection gap, our thesis in the new book is that we can learn a lot from these local initiatives to help do that.

What is a PGE?

A protection gap entity (PGE) is an organization that aims to address the difference between the amount of potential economic loss from a disaster and the amount of insurance that is available to cover that loss. PGEs can take a variety of forms, including government agencies, private insurance companies and nonprofit organizations. They can also use a variety of strategies to address the protection gap, such as providing subsidized insurance, offering insurance products that are tailored to specific risks and investing in disaster mitigation projects.

Three types of PGEs:

  • (Re)Insurer PGEs: These entities are typically established by the government or a consortium of insurers to provide insurance coverage to high-risk properties that would otherwise be uninsurable. They can take the form of either a new insurance company or a special subsidiary of an existing insurance company.
  • Government PGEs: These entities are typically established by the government to provide financial assistance to individuals and businesses that are affected by disasters. They can provide a variety of types of assistance, such as grants, loans, and tax breaks.
  • Multi-stakeholder PGEs: These entities are typically established by a coalition of government, insurance and community organizations to address the protection gap in a comprehensive way. They can develop a variety of programs and initiatives to promote disaster preparedness, risk mitigation and insurance availability.

Examples of PGEs:

  • Florida Hurricane Catastrophe Fund (FHCF): The FHCF is a government-run entity that provides reinsurance to Florida insurers for catastrophic losses from hurricanes.
  • California Earthquake Authority (CEA): The CEA is a nonprofit mutual insurance company that provides earthquake insurance to residential and commercial property owners in California.
  • New Zealand Earthquake Commission (Toka Tū Ake EQC): This government-owned corporation provides earthquake insurance to all properties in New Zealand.

The book raises the notion that PGEs arise in situations where there’s a disequilibrium of knowledge about a risk. You describe how this can come about where there’s either too little knowledge about the risk, and so it’s too uncertain to insure, or conversely, where there’s too much knowledge of the risk and it may be becoming uninsurable through increased insurance premiums.

PJ: The book is intended for policy makers, and we set it up around what we call a paradox framework. We must recognise that insurance works within a sweet spot of balancing tensions. The premiums of the many pay for the losses of the few. That’s a paradox, because if we know where the losses will come from year after year, we wouldn’t include those properties in the insurance pool. Insurance only works if the losses are random and not deterministically known.

If a risk is known definitively, insurance won’t really work. Effectively, it’s possible to have too much knowledge about the risk to make it affordable in terms of pricing. So, what’s happening in many markets is that high risk areas are being priced out of the market. The follow-on impact is that the collective insurance risk pool is less diversified, reduced in size and potentially unsustainable. It’s an unintended consequence. This challenges the traditional construct of insurance.

Given the increasing impact of climate risk on weather perils, how do you see the future of time-bound PGEs, whereby the risk pool aims to be transitioned back to the private sector at a point in the future when it’s deemed more sustainable?

PJ: Protection pools that have been all-encompassing in terms of their scope of perils (e.g. Spain’s Concorcio4) tend to be more successful in evolving than those that have a narrow focus. Those that are set up around a highly specific risk can often struggle to evolve at the rate the climate is changing. So, if a pool covers cyclone as windstorm only, it wouldn’t protect people from the associated flood that might arise from the windstorm (or vice versa).

It’s also to do with the integration of insurance and resilience (Chapter 5 in Disaster Insurance Reimagined5). If you only subsidise a pricing problem to keep insurance affordable and don’t address the underlying risk, then the risk won’t improve, and in all likelihood will get worse. It’s because the vulnerability isn’t improving. The NFIP (National Insurance Flood Program) has struggled with this issue. With PGEs that seek transition back to the insurance market, they can only do this by ultimately lowering the risk. If the risk remains high, there’ll always need to be a PGE. So, transitioning risk is dependent on increasing resilience and/or lowering the risk.

Antoine Bavandi: PGEs also have to be considered in the context of the broader disaster risk management agenda. And there’s a distinction between disaster risk reduction and risk financing practices. Historically, developing countries have traditionally focused their efforts on risk reduction, with governments and development partners aiming to reduce their actual exposure to the risk. Of course, at a national level this is extremely difficult (given the enormity of the exposure), so they have tended to focus their efforts on the risk financing of very specific populations (e.g., emergency relief for the poor and most vulnerable) or critical exposures or services (e.g., infrastructural assets). I think today that focus is slowly shifting to a more holistic approach which combines risk reduction and risk financing, and considers all potential sources of socio-economic and financial vulnerability together. And the role of PGEs there is fundamental, not only as risk bearing mechanisms but also as a risk management platform in the broader sense.

Around 70% of global natural catastrophe losses are uninsured. Are some natural perils proving more challenging to closing that protection gap than others?

AB: The rising impact of what we term secondary perils is important to mention. While these perils (such as flood, wildfire, severe convective storm and drought) are not always modelled, they have accounted for up to 50% of total economic losses lately. There’s also difficulty in pricing these perils and sometimes a limited market appetite. Flooding is an obvious one to talk about, but also, wildfire and drought, which are growing concerns.
For developing countries, the focus has tended to be on supporting emergency relief payments (e.g. a smaller payment focused on immediate help in the aftermath of a disaster, rather than insuring the total rebuild costs). Many of these schemes in recent years have been exposed to global Property Cat market cycles, whilst trying to expand to meet the demand and driven by increased awareness of the value of insurance as well as by institutional donors’ support.

PJ: I totally agree on the impact of secondary perils. Added to this is the way some climate perils are compounding and exacerbating risk to PGEs. Increased heat, for example, has compounding impacts on both drought and wildfire risk. Another example from researching the multi-sovereign risk pools (e.g. the Caribbean Catastrophe Risk Insurance Facility (CCRIF)) was the notable impact from excess rainfall on tropical cyclones losses. So while the risk product was covering the wind component, the damage was often coming from the secondary or associated rainfall peril, which is becoming more intense due to climate change.

How PGEs support imbalances of risk knowledge

Protection gap entities play a vital role for society by supporting markets in situations where risk knowledge may be limited. In such circumstances, Disaster Insurance Reimagined explains how PGEs become a viable option as the risk can be complex, poorly understood and highly uncertain. Sovereign-funded PGEs are often used to bridge the protection gap in such circumstances.

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Figure 15: Too little risk knowledge leading to an imbalance.

Conversely, protection gap entities also play a vital role in supporting markets in situations where risk knowledge is high. This perceived certainty of the risk can lead to significant premium increases and large numbers uninsured.

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Figure 25: Too much risk knowledge also leads to an imbalance.

Figures adapted from Jarzabkowski et al, 2023. Disaster Insurance Reimagined: Protection in a Time of Increasing Risk, Oxford University Press. PP: 32-41.

As we increasingly see evidence that climate change is driving more frequent, more severe and compounded natural hazard events, what does this mean for PGEs?

PJ: Many PGEs are well positioned in this regard — particularly those that are multi-peril in scope and mandated as they’ve continued to evolve with the risk. This gives them a certain anticipatory quality as they’re well aware of how the risk is changing in their country due to the challenges of climate change. For example, if you’re aware of rising sea levels in your country, then those more strategic (and difficult) conversations about managed coastal retreat or planned migration can happen more effectively than perhaps for schemes that are quite tightly defined in their risk scope. For these entities, I’m sure they will also adapt as well, but it might be more challenging.

AB: Our global interconnectedness is also a major factor. There’s more and more evidence that climate change is impacting countries. Emerging markets have exactly the same concerns over their exposure to global food security (e.g. food staple prices or commodities) as more developed nations. Gallagher Re is helping sovereign clients in Africa better understand their exposure to black swan events across a range of different scenarios, such as a major cyber security event or consecutive years of drought. These are vital questions as these events impact national productivity and cause immense disruption to their economies in a way never anticipated before and not captured by highly siloed model views. Whether its climate or macroeconomic modelling, we need to understand how these highly disruptive events propagate over time and space, through which transmission channels, and across which sectors and sub-sectors, so that the most critical exposures or vulnerable populations can be prioritized and protected adequately.

Do you have a view on the role of institutional donors for PGEs in developing countries?

PJ: International donors have played a very important role in bringing risk analytics to countries. This has helped in the modelling and ex-ante risk management. They also often provide premium financing in some cases and that helps embed anticipatory financing. That’s sometimes necessary to help spread the concept of co-sharing risk.

AB: There’s been fantastic work by international development partners and donors in firstly just defining the problem. Aside from the use of standard risk modelling tools, they’ve also put a strong focus on sharing best practice and making use of open platforms. A lot of credit should be given to Germany and the UK for leading the way on this — they’ve been particularly active on this agenda. Development partners and donors have also been important in developing a common language around risk management globally — a process which has included them promoting strategies on disaster risk reduction, disaster risk financing (and the benefits of combining retention and insurance instruments), and leading to strong governance schemes and improved value for money. The premium financing element though is probably the main game changer we have seen in recent years. That includes unprecedented levels of premium subsidies and co-financing, for a wider range of insurance products, and supported by systematic capacity development programmes and technical assistance. The Global Shield in particular is a prime example of impactful donor collaboration to meet the scale of the demand in this space.

What challenges do you see in the protection gap for developed markets?

PJ: One growing concern I have is in advanced countries where we’ve typically relied on indemnified loss aimed at reconstruction. There’s a traditional view that the market will run itself in these economies, with only a little regulation. My concern is that as the risk increases, insurance will retreat, either through withdrawal of cover or people being priced out through premium hikes. This results in creating long-term uninsured people.

One question we should start asking (where affordability is clearly an issue) is whether the role of insurance has to always mean being fully indemnified. Maybe we need to rethink insurance. Could some insurers limit their cover to just the get-back-on-your-feet amount? So, for a household that’s been flooded, the homeowner receives a set amount. Or is it an opportunity to build back better with more resilient properties after an event has occurred?

What could industry-academia collaborations like the Gallagher Research Centre be focused on to help close the protection gap?

PJ: While we know that making insurance mandatory and cross-subsidising it would dramatically reduce the protection gap, those things are much easier to say than to implement. So I think it’s important to support research to understand what’s stopping the wider adoption of insurance. Even though most of us know insurance protects us, and we have innumerable risk models, there’s something more complex in the social barriers we have to insurance adoption that are harder to understand. Further qualitative studies in the social sciences around this would be immensely useful in terms of how people experience insurance and what value they put upon it as a form of protection. That will be particularly important as more people fall out of the insurance net because otherwise we may not get those long-term uninsured, who have not experienced it as a source of post-disaster relief, back into insurance at all.

How can we help?

Please contact our Gallagher Re Public Sector and Climate Resilience Solutions practise to learn more about our work in strengthening the resilience of public and corporate clients against the financial impacts of climate and disaster risks.






5. Jarzabkowski, Paula, Chalkias, K., Cacciatori, E., & Bednarek, R, Disaster Insurance Reimagined: Protection in a Time of Increasing Risk (Oxford, 2023; online open access edn, Oxford Academic, 24 Aug. 2023. PDF file.)


The opinions and views expressed in the above articles are those of the contributor only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision based on the information.