The article was first published on OMFIF on February 27th, 2026.

Regula Hess is Senior Adviser and Maud Adbelli, Global Lead of the Greening Financial Regulation Initiative at WWF Switzerland.

Across advanced economies, the widening insurance protection gap is becoming a material concern for financial regulators, central banks and governments. As climate-related disasters intensify, a growing number of economic losses are going uninsured, shifting risk from insurers’ balance sheets onto households, businesses and public finances.

A new WWF white paper warns that the trend cannot be reversed without addressing a critical blind spot in financial and supervisory frameworks: the accelerated loss of nature.

How nature loss increases the cost of climate-related disasters

While climate change is central to the problem, WWF’s analysis shows that ecosystem degradation is a major and often underestimated source of economic loss.

Healthy ecosystems, such as forests, wetlands and coastal systems, play a crucial role in reducing the physical impacts of extreme weather. When these natural buffers are degraded, climate hazards push risks beyond insurable thresholds. In regions of widespread deforestation, for example, the risk of large-scale flooding can increase by as much as 700%. This sets off a vicious cycle: losses mount, resilience erodes and insurers pull back, amplifying the impact of the next disaster.

In 2023, global disaster-related losses reached an estimated $2.3tn once indirect impacts and losses from ecosystems were included, revealing the true scale of degraded natural capital and climate change.

Indirect effects beyond property insurance are underestimated

In the US, uninsured direct disaster losses averaged around $64bn per year between 2021 and 2024. In the European Union, the gap reached approximately €59bn per year between 2021 and 2023. Yet this is only a lower bound estimate. It excludes direct losses such as damage to nature and indirect effects on household income, asset prices, mortgage markets or credit conditions.

The insurability challenge goes well beyond property insurance. Climate- and nature-related risks are increasingly driving losses across health, agriculture, infrastructure, liability and business-interruption insurance lines.

Public finances are particularly exposed (Figure 1). As private insurance withdraws from high-risk regions, governments are increasingly assuming the role of ‘insurer of last resort’, often without explicit, or well-designed frameworks. Fiscal pressures are rising, driven by higher emergency response and reconstruction costs, greater pressure on public and public-private insurance schemes, and falling tax revenues following major disasters.

At the same time, ecosystem restoration falls on taxpayers and remains systematically underfunded.

Prevention as a financial stability tool

Prevention delivers far greater value than post-disaster relief. In the US, every dollar invested in climate resilience can save up to $13 in avoided losses; in the UK, each £1 spent on flood risk management avoids around £8 in damages.

Nature-based solutions are among the most cost-effective preventive measures. In Switzerland alone, protective forests generate benefits estimated at CHF4bn ($5.17bn) annually in disaster risk reduction and can be up to 25 times more cost-effective than engineered alternatives. Such investments reinforce insurance markets by lowering expected losses, thereby supporting insurability.

Implications for financial regulators, central banks and governments

These findings underline the need for a strategic rethink on how to address the insurance protection gap: financial resilience depends not just on risk transfer, but on climate mitigation and nature restoration for risk reduction (Figure 2). For financial authorities, this has four implications.

First, supervisory assessments need to go beyond recording physical destruction caused by extreme weather events to capture their economic and financial consequences. This includes insurance availability and affordability, household income and wealth, business competitiveness, price and financial stability, and the fiscal position of governments. This requires a macroprudential approach to addressing insurance and protection gaps.

Second, supervisory frameworks need to better reflect nature-related risks and the role of risk-reducing ecosystems. Current stress tests and supervisory tools increasingly incorporate climate risk, but biodiversity loss, ecosystem degradation and the role of nature-based solutions remain largely absent. This leads to an incomplete risk assessment.

Although attention to insurance protection gaps is growing, regulatory responses remain fragmented. WWF’s SUSREG Assessment 2025 shows that macroprudential approaches to climate and nature-related risks are not yet fully embedded in insurance supervision.

Third, policy responses should incentivise the reduction of root causes. Public-private insurance schemes are essential, but strong incentives for resilience are required to reduce underlying risks. Public interventions in private insurance markets should be systematically linked to investments in prevention and adaptation, and require transition plans from participating insurance companies.

Fourth, nature should be better embedded in adaptation, response and recovery planning. Post-disaster recovery efforts that ignore ecosystems can increase future risks and fiscal costs.

As the impacts of climate change and nature loss intensify, the challenge for public authorities is no longer whether insurance markets will come under pressure, but whether policy frameworks can evolve to reduce risk at its source. Protecting and restoring nature is not only an environmental priority; it is necessary to safeguard public finances, stabilise insurance markets and preserve the foundations of financial stability.