What is the Protection Effect of a Compulsory Nat-Cat Insurance System? An Italian Case Study

Abstract The rising frequency and severity of climate-related disasters calls for stronger financial protection mechanisms. Natural catastrophe (Nat-Cat) insurance is a key ex ante tool to mitigate vulnerability and reduce reliance on post-disaster public aid. In Italy, Law No. 213/2023 introduced compulsory Nat-Cat insurance for businesses, aiming to transfer part of the risk to the private sector. This paper combines a legal assessment of the reform with a model-based prediction grounded in European data to evaluate its potential effectiveness. The results show that greater insurance coverage lowers the Protection Gap Score (PGS), but the effect is uneven: it is most effective for floods and wildfires and at low to intermediate levels of risk, while it becomes negligible under extreme hazard conditions. These findings highlight both the potential and the limits of compulsory insurance. The study concludes that Law No. 213/2023 is a step forward for Italy’s financial resilience, but that its success depends on compliance incentives, broader coverage, and integration with preventive risk management policies.