This blog was researched and written by participants in Pinnacle’s 2026 Pinnacle University development program.

Protection gap in insurance refers to the difference between total economic losses and the amount of loss that is actually insured. Typical losses can include financial damages resulting from a weather event, property damage, business interruption or other direct and indirect costs. In recent years, data suggests that industry-wide protection gaps have been widening, specifically in areas such as cyber risk and natural catastrophes.

In the last few decades, increasing adoption of digital technologies has resulted in growing cyber risks in frequency and severity for businesses and organizations in practically every industry. Notably, the global cyber insurance market saw premiums more than double over the past five years. But even as the cyber insurance market grows, cyber threats are evolving and becoming more complex, making it difficult for insurance solutions to keep up. Many organizations still find themselves underinsured or without coverage at all, resulting in a cyber protection gap that continues to widen. The growth of the global cyber protection gap is expected to continue to increase from $14 billion in 2023 to an estimated $29 billion by 2027.

Natural catastrophes have also seen an increasing protection gap. Over the last decade, annual U.S. losses due to natural catastrophes have averaged $210 billion dollars. The insurance industry, which plays a critical role in providing financial protection, is presented with additional and significant challenges in terms of risk management and pricing. Despite progress in covering losses, over 60% of global natural catastrophe losses remain underinsured.

The natural catastrophe protection gap is due to several factors, including a lack of access to affordable insurance, low insurance penetration in high-risk areas and insufficient awareness of the importance of insurance. Nearly two out of three homes in America are underinsured, and the average underinsurance amount is 22%.

In recent years, insurers have taken creative steps to address increasing protection gaps. The following three case studies highlight those instances in which insurers used alternative risk transfer solutions to address and reduce protection gaps and the limitations of conventional models.

Case Study Number 1. Arbol: Closing Climate Risk Gaps with Flexibility

Oftentimes, captive insurance companies are set up and run by their insureds. By creating their own captive, Climate Risk Insurance Company, Arbol gains flexibility to design customized, scalable coverage that reaches more industries that would have otherwise fallen into the protection gap.                                                                                                                                  This tool not only improved financial resilience but also made climate insurance more accessible, especially in high-risk regions. Arbol is filling a critical gap where traditional insurance has left businesses exposed.

Case Study Number 2. Acorn Re: Transferring Earthquake Risk to Capital Markets

In high-risk regions like the state of California, earthquake coverage is limited and expensive. Acorn Re, a catastrophe bond issued by Kaiser Permanente’s captive insurer was created to address earthquake risk. Catastrophe bonds require investors to invest principal into the bond. If the costs of natural disasters during a period of time do not exceed a specified amount, the principal plus interest is returned to the investors. If the costs do exceed the specified amount, the bond will help reimburse the insurer for losses due to natural disasters. For Acorn Re, the bond transferred their earthquake risk directly to the capital markets, providing stability, affordability and speed.

Key features of Acorn Re’s catastrophe bond include:

• Multi-Year Bond Maturity: Unlike traditional reinsurance which renews annually, this bond offers multi-year pricing stability and efficient capital use.
• Tiered Parametric Trigger Model: Known as "Cat-in-the-Box," the bond pays out different pre-agreed amounts based on seismic activity in predefined zones. Payouts are triggered at 25%, 50%, 75% or 100% levels based on severity.

This model enables faster, more predictable funding after disasters, reducing Kaiser’s need for large reserves while ensuring community-level financial resilience.

Case Study Number 3. NYC Pilot Flood Program: A Community-Based Insurance Breakthrough

Flood risk in New York City is evolving, with rainfall-driven floods now causing significant secondary damage to the sewage system. Traditional flood insurance is often inaccessible or slow to respond. To solve this, in February 2023, the city launched a Community-Based Catastrophe Insurance (CBCI) pilot program for underserved neighborhoods. The program worked in the following way:

• The Center for NYC Neighborhoods bought parametric flood insurance from Swiss Re.
• In the event of a major flood, payouts would go directly to the Center for NYC Neighborhoods, which would distribute grants (up to $15,000) to affected households that applied for the assistance program.
• The pilot was supported by the National Science Foundation and backed by Swiss Re, Guy Carpenter, Marsh McLennan, and ICEYE, with all providing expertise in reinsurance, risk modeling and satellite-based flood monitoring.

While no payout was triggered during the pilot period, the program successfully demonstrated a scalable model for inclusive, affordable flood insurance, especially for low-income households often left out of traditional systems.

The insurance industry has a long record of innovation and adaptation. From Arbol’s tailored parametric solutions to Acorn Re’s capital market risk transfer and NYC’s innovative community-based pilot, these cases show how the insurance industry can evolve to meet challenges such as protection gaps. By bridging protection gaps with flexibility, financial innovation and public-private partnership, these approaches help communities and businesses build resilience against the growing threat of emerging risks.