The insurance–bank nexus: the climate protection gap as a source of risk for the financial system

As physical climate risks intensify, there is a growing possibility that banks will be materially affected by unavailable or inadequate insurance coverage. The climate insurance protection gap, defined as the sum of all losses triggered by climate hazards which are uninsured or underinsured, has potential impacts on the stability of the financial system.

This policy insight explores the risks associated with the insurance–bank nexus, focusing on property and casualty insurance at the global level. The authors provide new insights for banks, international standard-setters, financial stability authorities and insurance and banking supervisors.

Core recommendations

Understanding and addressing these challenges requires not only action by supervisors and governments, but also stronger coordination with the banking sector. This should involve:

• Acknowledging the limitations of insurance products in climate risk management.
• Strengthening cross-functional bank coordination on insurance protection gap risks.
• Reinforcing banks’ insurance-related data collection and infrastructure.
• Integrating the insurance–bank nexus into scenario analysis and stress testing frameworks.
• Further advancing risk reduction through sound banks’ risk management and financial stability measures.