Just 30% of catastrophic losses caused by extreme weather events have been insured over the last decade, creating an insurance protection gap of $1.7trn (£1.3trn).
That is according to a global network of 28 insurance organisations, which highlight how only one-fifth of homeowners in Greater Houston had flood cover when Hurricane Harvey struck in August.
Insurance penetration is even lower in developing countries, leaving countries highly vulnerable when floods, droughts or hurricanes strike, as seen in India and Bangladesh this year.
"Our industry has been shaken by climate perils, and 2017 is on track to become one of the most expensive years on record," said Maurice Tulloch, chair of ClimateWise, the umbrella group of insurers.
"The climate risk protection gap presents insurers with one of our industry's most profound challenges, but the cost of extending sustainable insurance cover is simply not affordable in many places."
ClimateWise members collaborate to gain a better understanding of how to address the protection gap and include some of the world's biggest insurers, such as Swiss Re, Allianz and Willis Towers Watson.
The gap is expected to get worse over the coming years as the frequency of severe weather events increases, with the majority of the insurance cover shortfall so far covered by governments and civil societies.
In addition, with half of the world's population living in cities, and 1.5 million people migrating to urban areas every week, the insurers argue improving resilience to climate-related disasters is more important than ever.
"Cities are at the epicentre of the climate risk protection gap crisis, given their concentration of economic activity and vulnerability," said ClimateWise director, Tom Herbstein.
"This presents many opportunities for new partnerships and products. Insurers must start proactively exploring where, within their own value chains, and collaboratively across the industry, these opportunities lie."
The Financial Stability Board’s Task Force on Climate-related Financial Disclosures said ClimateWise members have made progress and should now test their strategies against different climate scenarios, and encourage others to do the same.