Eiopa chief calls for greater cooperation on climate-related risk

European supervisors back capital mobilisation for cat risk PPPs

Petra Hielkema, chairperson of the European Insurance and Occupational Pensions Authority (Eiopa), has told the World Federation of Exchanges (WFE), the association of stock, futures and options exchanges, that it has a critical role to play in helping build more effective risk transfer solutions to the problems caused by climate change and the worrying insurance protection gap.

Hielkema gave a speech at a meeting of the WFE this week in which she pointed out that taking a ten-year view, the recent World Economic Forum (WEF) risk report finds that environmental risks take five out of the top ten spots. In fact, they make up the first four, with extreme weather events at number one.

This needs a more coordinated and effective response from the insurance and wider financial markets, as well as the creation of public private partnerships with loss prevention and risk management at their core, said Hielkema.

“Eiopa is well aware of not just the human costs of climate change… but also of the economic costs. And we know that only one-quarter of EU climate-related catastrophe losses is currently insured. As the climate-related catastrophes grow in both frequency and intensity, without any action taken, we can expect this protection gap to widen,” she said.

“For Eiopa, aside from asking how we can close protection gaps, we also have to ask how we transform to more resilience in this context. To get this right is essential in order to continue to preserve financial stability while encouraging growth. How can we do that?” she asked.

The short answer is cooperation and investment, said Hielkema.

The Eiopa chairperson said that climate risk cannot be successfully tackled by any one entity alone. It cannot even be successfully tackled by many entities – especially if they are acting independently. The only way forward is through cooperation, commitment and communication, she said.

This, pointed out Hielkema, is often easier said than done. “Commitments made can easily unravel, especially in the face of economic uncertainty, high inflation and a cost of living crisis,” she said.

But cooperation is always possible and she highlighted Eiopa’s recent work with the European Central Bank (ECB).

“I mentioned just now that only a quarter of losses are insured. This protection gap poses wider risks to the economy and financial stability. When losses are not insured, it takes longer for families and businesses to get back to normal. For businesses specifically, lengthy supply chain disruptions can impact other businesses, possibly affecting the ability to pay back loans. In the absence of a solution in the market, people will look at the government for help. However, this help often takes longer and government finances may be weakened if they need to step in,” she said.

Hielkema pointed out that adequate insurance cover would go some way to mitigate these risks, but said uptake for this type of insurance is “not what it should be”.

Eiopa and the ECB have worked together on possible actions to increase the uptake and efficiency of catastrophe insurance, while creating incentives to adapt to and reduce climate risks, she added.

“In the first instance, the recommendation is 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,” said Hielkema.

The Eiopa chief also stressed that there is a big a role for reinsurance as a first line of defence to cover losses from climate-related natural disasters. The use of financial markets to transfer risks via catastrophe – or cat – bonds may also help reinsure such risks, she added.

“Indeed, capital market instruments, such as cat bonds, can complement insurance schemes to provide fast relief for reconstruction after disasters. They can also help to pass on part of the tail risk assumed by private (re)insurers and/or public-private partnerships to capital markets,” suggested Hielkema.

“Capital market instruments, which are often used together with traditional reinsurance, provide two key benefits: (i) the diversification in the form of an alternative source of capital and (ii) a lower premium for overall coverage,” she explained.

“Nonetheless the frequency of climate-related catastrophes also has an impact on the price of reinsurance, which in turn affects the primary insurer and ultimately the policyholder, leading to a possible situation where insurance is simply unaffordable,’ added Hielkema.

It is at this critical point that national or European public-private partnerships (PPPs) can play a role through pooling capital that can enhance the ability of member states, or even the EU, to respond to the climate-related events in an orderly way. This way forward was suggested by many individual risk managers who took part in last year’s Risk Frontiers Europe survey, and the move is supported by Ferma.

“We now see several examples of public-private partnerships developing and will continue to monitor this in 2024 at the EU and international level. We will also continue our work with the ECB on this matter, with a focus on the role of capital markets and financial products to create more capacity for these events, as well as possible forms of risk-pooling that could be considered. We will communicate about this work throughout the year,” promised Hielkema.

All risk management is based on data, the more and higher quality the better. In systemic risk areas such as nat cat and cyber, it is in everyone’s interest for improved data sharing and communication. Hielkema said that Eiopa is on the case in this regard.

“Closely linked to cooperation is communication. And here I mean both raising awareness and sharing knowledge. I just spoke about the low uptake of insurance cover against natural catastrophe events. There are different reasons for this – from the ‘I will never be able to afford cover’ to ‘It will never happen to me’,” she said.

“These statements show just how much work needs to be done to raise awareness about the destruction that climate change can cause and the value that insurance can offer. Sharing expertise and data, including on catastrophe modelling, is therefore essential to improve risk awareness and incentivise adaptation and mitigation efforts. And in our capacity as a centre of excellence for catastrophe modelling and data, Eiopa is able to provide both insurers and supervisors with the tools and data so that they can effectively assess, monitor and supervise catastrophe risk,” continued Hielkema.

She pointed out that at the end of last year, Eiopa launched its catastrophe data hub, which provides Europe-wide data on insured losses from extreme weather events, such as the 2017 wildfires in Portugal.

Also at the end of last year, Eiopa published its updated nat cat dashboard. It shows the risk for five nat cat perils in each EU members state and how much of that is insured.

“Cooperation, commitment and communication can be easier said that done. But the truth is that however hard, we have to do these things if we are to have success in addressing the effects of climate change,” concluded Hielkema.

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