EIOPA and ECB outline policy options to promote climate catastrophe insurance

The European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB) call for increased uptake of climate catastrophe insurance to limit the growing impact of natural disasters on the economy.

venice floodsIn their recently published discussion paper they set out policy options on how to better insure households and businesses in the European Union against climate-related natural catastrophes, such as floods or wildfire.

Currently, only one-quarter of EU climate-related catastrophe losses are insured; in some countries, the figure is below 5%.

According to experts, this is partly because many people underestimate the costs of climate-related damage; and in some cases, some also shy away from insurance, preferring to rely on government support.

As the impact of climate change grows, insurance costs are expected to rise, with the possibility of some insurers reducing their risk coverage or stopping providing certain types of cat insurance altogether.

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Actions like these, experts warn, would widen the insurance gap further.

“We need to increase the uptake of climate catastrophe insurance to limit the growing impact of natural disasters on the economy and the financial system,” said ECB Vice-President Luis de Guindos. “However, to reduce losses in the first place, we must ensure that a smooth and speedy green transition is complemented by effective measures to adapt to climate change.”

EIOPA Chairperson Petra Hielkema added: “Insurance plays a major role in protecting businesses and people against climate-related catastrophe losses by swiftly providing the necessary funds for reconstruction.

“In order to efficiently protect our society, we need to address the concern of the increasing insurance protection gap by proposing and finding appropriate solutions.”

The lack of climate catastrophe insurance can affect the economy and financial stability. If losses are not covered by insurance, the speed at which households and firms can resume their activities is reduced, slowing economic recovery.

Lasting supply chain disruptions, experts add, can also lead to spillovers from one firm to another and affect firms’ ability to pay back loans, thereby increasing banks’ exposures to credit risk. Additionally, the financial position of governments may be weakened if they need to provide relief to cover uninsured losses.

To boost insurance coverage, the ECB and EIOPA have suggested that insurers should design their policies to encourage households and firms to reduce risk. This could be, for example, by granting discounts for implementing effective mitigation or adaptation measures.

Also, to support the overall supply of insurance, the use of catastrophe bonds could be increased to pass on part of the risk to capital market investors, and governments could set up public-private partnerships and backstops to partly cover the costs that insurers may incur in the event of major disasters, according to the paper.

To protect themselves and ensure that public funds are used efficiently, governments should also provide strong incentives to reduce risks.

Finally, national-level insurance schemes could be complemented by an EU-wide public scheme that makes sure sufficient funds are made available to European countries for reconstruction following rare, large-scale climate-related catastrophes.

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