EIOPA and ECB outline policy options to promote climate catastrophe insurance

More sophisticated frameworks need to be put in place in Europe to deal with extreme weather events including public-private partnerships (PPPs), public backstops and an EU-wide public scheme for natural disaster insurance. This is according to the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB).

In a joint discussion paper on how to better insure households and businesses in the EU against climate-related natural catastrophes such as floods or wildfires, the two organisations noted that only about a quarter of all climate-related catastrophe losses in the EU are insured, In some countries the figure is below 5%, and the gap is expected to widen as the impact of climate change grows.

The discussion paper outlines policy options to promote climate catastrophe insurance aimed at boosting uptake and efficiency while creating incentives to adapt to and reduce climate risks.

“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 paper noted that insurance costs are expected to rise and some insurers may reduce risk coverage or stop providing certain types of catastrophe insurance altogether, which would widen the insurance gap further.

EIOPA and the ECB suggest that insurers should design their policies to encourage households and firms to reduce risk, for example by granting discounts for implementing effective mitigation or adaptation measures.

The paper states: “As natural catastrophe risks are expected to grow and become more difficult to insure, policymakers need to consider putting in place more sophisticated frameworks to deal with extreme weather events and minimise future costs to taxpayers. These include PPPs and ex ante public backstops – which could be reinforced by an EU-wide component – together with suitable safeguards and incentives to promote risk mitigation. The purpose of such approaches is not to provide blanket government guarantees for uninsured losses but to enhance efficiency in the use of public funds and reduce moral hazard relative to the typical status quo of unconditional government support after disasters.”

It went on: “The public sector can prepare for contingent liabilities related to climate-related catastrophes by enhancing its ex ante disaster risk management strategy… Governments can support and encourage the development of an active market for the issuance and trading of cat bonds, for example by lowering issuance costs. For less frequent, large-scale disasters, an EU-wide public scheme for natural disaster insurance covering a broad range of weakly correlated hazards could complement national schemes.”