Eiopa ready to back PPPs to cope with nat cat risk

Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority (Eiopa), has told chief risk officers at Europe’s leading insurance and reinsurance companies that the regulator continues to discuss “policy options” on how to better insure EU businesses and households against climate-related natural catastrophes with the European Central Bank (ECB).

Last year Eiopa issued a joint discussion paper that proposed policy options aimed at increasing the uptake and efficiency of climate catastrophe insurance, while creating incentives to adapt to and reduce climate risks.

It advocated for a comprehensive solution to expand coverage with four pillars. These are:

• Policies designed with adaptation and mitigation measures.
• Catastrophe bonds.
• Public-private partnerships at the national level.
• Partnerships at the EU level to cover losses that may be difficult to insure against via market-based solutions only.

Hielkema told the recent CRO Forum’s annual conference in Venice, that in order to make sure climate change-related risks remain insurable in the future, both consumers and insurers need to contribute to climate change adaptation and mitigation.

“Impact underwriting, that is, insurance provisions specifically designed to encourage consumers to reduce their vulnerability to climate-related risks, will help. This can mean risk-based pricing, for example. And insurers have the data, expertise and risk assessment capacity to do this. In turn, consumers will have an incentive to do what is in their hands,” she said.

“Another part of the solution entails the use of capital market instruments such as catastrophe bonds. These offer insurers and private reinsurers a way to transfer some of the risk associated with underwriting policies on to capital markets,” continued Hielkema.

The Eiopa leader said that public-private partnerships (PPPs) need to be strengthened at national level so they can contribute to greater resilience.

“They can support the insurance market by providing additional coverage either via direct insurance or by indemnifying a private (re)insurer against extraordinary events. The same applies to partnerships at the EU level,” said Hielkema.

There is a role for everyone to play –  citizens, insurers, governments and, of course, supervisors – in a successful PPP, she said.

The Eiopa chief said that the basis for sound PPPs is rooted in the first step of the ladder – risk mitigation and adaptation – with citizens protecting themselves by doing what is in their power to reduce their exposure to natural catastrophes.

“There is a role here for national governments, it is to communicate clearly to citizens about where the public authorities can and cannot step in. Last summer Eiopa looked at consumer behaviour impacting the demand side of nat cat insurance. We discovered that one of the main reasons people do not take up natural catastrophe insurance is their belief that their government will step in, step in to a far greater extent than it actually can. So countering this false perception with honest, clear and easy to understand information is important,” she said.

Hielkema added that there is room for greater collaboration between the insurance industry and local governments. For example, she said city councils can engage with insurers and draw on their expertise to fully assess potential nat cat risks before making decisions on new developments.

“This is important for resilient urban development, too. It is in this context that Eiopa is happy it was asked to join the Climate Resilience Dialogue, created by the European Commission. The goal of the dialogue is to create a forum for discussion that will strengthen the collective understanding of insurers, reinsurers, businesses, consumers, supervisors and other stakeholders about the climate protection gap,” she told the CROs.

Hielkema said that Eiopa is continuing to work with the ECB to further promote policy options designed to increase the uptake of climate catastrophe insurance, while creating incentives for people to adapt to and reduce climate risks.

“Presently we are looking at public-private partnerships that exist at national level – both within and beyond the EU – to draw lessons that are relevant for the EU market,” she said.

“Decisions on how to make insurance available and more affordable are also political. This applies to the creation of PPPs at national level as well. The political will must come from national governments. And when it does, Eiopa is there to support the political impetus with factual assessments. We can reinforce the debate with sound technical findings and by sharing knowledge so that PPPs can be established successfully,” explained Hielkema.

“In our latest work with the ECB we have reviewed and assessed 12 national catastrophe pooling schemes with different degrees of public sector involvement. We are studying their key characteristics. We are asking what are their strategic objectives, their scope, their design? How do they manage risks? And what financing strategies underlie them? Insights gained from this analysis will also serve as a basis for future discussions with the insurance sector and with policy makers,” she added.

The inaugural ESG Insight and Intelligence Conference will take place in London on 26 June. This event will examine the European regulatory demands associated with ESG, look at the impact on the corporate risk profile and consider how these risks can be managed more effectively. It will also drill down on the increasing demands and disclosures requirements placed upon insurance buyers by insurance carriers. For more information, please visit https://events.commercialriskonline.com/ESG-24