Unlocking capital markets to close the protection gap demands standardised infrastructure: Montauk Point’s Michel

As the global protection gap continues to widen, closing it is no longer a question of mobilising more capital, it is a matter of engineering entirely new markets.

A new paper authored by Gero Michel, Chief Risk & Analytics Officer at Montauk Point Ltd., argues that the primary obstacle to scaling risk transfer is not a scarcity of capacity, but an adaptation gap between evolving risks and the institutions designed to transfer them. This gap is reflected in translation, innovation, and structural barriers between a highly specialised insurance industry and capital markets that demand transparency and standardised infrastructure.

In the paper, Michel argues that the protection gap continues to widen not because capital is scarce, but because the nature of risk and economic value is changing faster than insurance and capital markets can adapt.

“Changes in risk drivers – including climate change and geopolitical instability – are increasing uncertainty in established insurance lines. At the same time, globalization, digitalization, and efficiency-driven systems are making risks more interconnected and systemic. A growing share of economic value now resides in intangible assets, data, networks, and supply chains – areas that are difficult to define, value, diversify, and insure,” Michel explains.

Michel continued: “The resulting mismatch is structural, emerging between the risks society seeks to transfer and the risks that existing insurance mechanisms are designed to absorb. Insurance standards may ultimately prove more important than new products or additional capital.”

While insurance has standardised many regulatory and operational processes, products and contract wording still tend to remain fragmented across jurisdictions.

Therefore, Michel stresses that developing globally compatible insurance standards for products, data, and legal frameworks could become a prerequisite for scalable risk transfer.

“The role of capital markets could be to help bridge the protection gap. Unlike insurers – who depend heavily on diversification and balance-sheet capacity – capital markets are more accustomed to pricing systemic uncertainty. However, capital does not automatically flow to risk. Investors require credible models, legal certainty, governance, scalable structures, and sufficient market depth,” Michel added.

“This perspective suggests that the protection gap reflects less a lack of capital than a lack of institutional innovation, standardisation, and market design. Current efforts often extend traditional insurance products into new markets, even as emerging risks challenge their underlying assumptions. The central challenge is therefore not only to transfer more risk, but to build the products and institutional and market frameworks that make evolving risks investable. The protection gap is increasingly a problem of market creation rather than risk transfer,” the Chief Risk & Analytics Officer continued.

Later into the paper, Michel observes that the protection gap reflects a growing mismatch between both the speed of risk evolution and the speed of institutional adaptation.

This comes as emerging risks continue to evolve, such as cyber, AI liability, climate transition, and complex supply-chain exposures.

In contrast, Michel notes that insurance markets, regulatory systems, and capital-market structures tend to adapt slowly due to a combination of data and model development cycles, regulatory approval processes, the need for track records and trust, as well as investor requirements for transparency and governance.

The result is not primarily a shortage of capital however, and as Michel states, global capital markets are abundant, but capital itself does not automatically flow to risk.

In conjunction, he notes that for capital to participate at scale, risks must be understandable and modelled with credibility, supported by stable governance and legal certainty, structured into repeatable, investable formats, and embedded in scalable market infrastructure.

“Historical successes, such as catastrophe bonds, illustrate this point. They scaled not merely because risks could be modelled, but because they combined credible analytics with transparent structures, legal certainty, and a repeatable investment proposition in a market that, at least initially, offered attractive and sustainable returns,” Michel explained.

Importantly, Michel observes that although global capital markets are orders of magnitude larger than the insurance industry and have repeatedly demonstrated their ability to innovate, structure, and finance complex risks, the question remains why relatively little of that innovation has reached the insurance industry. Michel argues that for institutional investors, insurance can sometimes appear as a highly specialised and regulated space that is difficult to access.

“Conversely, insurers may view capital markets as lacking the domain expertise, relationship focus, and long-term underwriting perspective needed to participate effectively in insurance risk. The result is a translation gap between two industries with highly complementary capabilities, he explained.

Michel continued: “Innovation gap represents a second and closely related challenge. Translation concerns communication and compatibility between insurance and capital markets, whereas innovation concerns the willingness and ability to experiment with new products, structures, and business models. Despite the size and sophistication of global capital markets, experimentation has remained limited. Rather than redesigning the interface between insurance and capital markets, most innovation has focused on transferring existing insurance and reinsurance risks into capital-market structures. These differences have slowed experimentation and the development of genuinely new, scalable markets for emerging risks.”

Additionally, Michel notes that larger investors sometimes avoid most insurance risks because they are too long-term, complex, and expensive to package into investments.

“Insurance liabilities may extend over decades, while capital-market investors typically collateralize individual products or portfolios and operate with shorter investment horizons, greater liquidity requirements, and mark-to-market constraints. Structuring costs – including SPVs, tranching, legal documentation, modelling, and reporting – remain economically viable primarily for larger, standardized risks,” Michel explained.

“Diversification is also weaker than often assumed. Catastrophe risks become increasingly systemic through climate and geopolitical trends, geographic concentration, globalization, supply-chain dependencies, and shared model uncertainty, while correlations are reinforced because insurance premiums and capital are themselves invested in financial markets. As a result, innovation has largely concentrated on replicating existing reinsurance structures rather than creating genuinely new markets. Catastrophe bonds and collateralized reinsurance have focused primarily on peak catastrophe risks that are comparatively well understood and already well served, while smaller, more frequent, emerging, specialty, agricultural, and intangible risks remain comparatively underserved,” he continued.

In regard to risk modelling, which is a key component that’s used to help close the protection gap, Michel states that advancements in data computing, and modelling are steadily expanding the range of risks that can be analysed, priced, and ultimately transferred across climate, cyber, liability, legacy, and other emerging risks.

Taken together, it appears that these observations suggest that the challenge no longer surrounds mobilising additional capital, but instead, overcoming the translation and innovation gap between insurance and capital markets.

“Closing the protection gap will depend less on replacing insurers than on combining the complementary strengths of both industries through better market design, standardization, experimentation, and institutional innovation,” Michel explained.

Concluding: “The protection gap persists not because risks are uninsurable or capital is scarce, but because evolving, increasingly systemic and intangible risks fail to meet the institutional, behavioural, economic, and market design conditions required to make them investable.

“Closing this gap requires shifting from improving existing mechanisms to actively designing markets. This includes standardizing risk structures, expanding parametric and modular products, and building shared data and modelling frameworks to improve transparency and investor confidence. Addressing demand-side constraints is equally critical. Digital distribution, embedded solutions, and targeted public support can enhance access, affordability, and trust, particularly in underserved segments.

“Innovation may ultimately prove as important as capital. Closing the protection gap requires not only greater participation by capital markets but also greater experimentation in how insurance risks are structured, standardized, and transferred. Bridging the behavioural, institutional, and professional divide between insurance and capital markets may therefore become as important as overcoming technical or regulatory barriers.”