Europe turns to more nat cat PPPs as risk mounts: Morningstar DBRS
Insurance covers just 1% of losses from nat cats in Greece and 3% in Italy
Risk pools and state-backed reinsurers to cover losses caused by natural catastrophes could become more widespread in Europe as the frequency and severity of weather events increases, according to analyst Morningstar DBRS. While an EU-wide insurance scheme could be implemented “at some point”, the analyst said, the EU institutions are currently more focused on post-disaster relief and climate adaptation.
Instead, schemes such as those already in place in Spain via the state-owned Consorcio de Compensación de Seguros, which applies a surcharge on premiums for nat cat losses, and France through public reinsurer Caisse Centrale de Reassurance, could be replicated in other European countries. Earlier this year, Italy introduced a requirement on Italian firms to insure their business from cat risks including earthquakes, storms and floods with the government acting as reinsurer for Italian export credit agency SACE, which will cover 50% of the risk up to a maximum of €5bn.
Publishing a report on the future insurability in Europe against nat cats, Morningstar DBRS said insurance covers about 27% of total economic losses from weather-related catastrophes on average across the European Economic Area, arguing that insurance schemes between the public and private sector could help close the insurance protection gap, which will only grow as severe weather becomes more frequent and losses rise.
Countries such as Greece and Italy have an even higher insurance protection gap, with insurance covering just 1% of economic losses from extreme weather-related events in Greece and 3% in Italy, which reported the third-highest economic loss from nat cats after Germany and France. The Netherlands registered the lowest insurance protection gap at 51%, followed by Germany and the Czech Republic both at 36%.
“The intensification of catastrophic events’ frequency and severity could prompt to lower affordability and availability of insurance protection, which is not conducive to reducing the insurance gap”, said Mario De Cicco, vice-president, global insurance ratings at Morningstar DBRS. “One of the solutions involves efficient partnerships between the public and private sector, which may become more widespread across the European continent.”
The report added: “While we do not foresee any significant impact from climate-related risks on European insurance companies credit ratings in the short term, we will continue to monitor their exposure to natural catastrophes and the implementation of insurance schemes and PPPs as an important risk-mitigating mechanism thanks to their risk-pooling benefits.”
Insurers are likely to increase premiums as the risk of nat cat losses grows, Morningstar DBRS said, and this could further increase the protection gap. Some underwriters will retreat from insuring assets in areas at elevated risk of extreme climate and weather-related events, but Morningstar DBRS warned this would be negative for the industry.
“By maintaining strict underwriting standards and developing new risk management framework to incorporate climate risks more effectively, insurance companies should be able to continue fulfilling their role as a key contributor to tackling the challenges of climate change,” it said, suggesting that insurers could offer incentives to policyholders that implement adaptation and risk mitigation measures to lower their physical risk from losses.
The European Environment Agency recorded economic losses of €59bn in 2021, driven by floods, while the majority of a €52bn loss in 2022 was caused by heatwaves, cold waves, droughts and wildfires. Last year, Europe recorded the highest number of days with severe extreme heat stress – with the largest wildfire on record for Europe in Greece – while flooding is expected to be one of the costliest climate events of 2023.
“These losses have been manageable, but with the intensification of extreme weather conditions directly affecting the frequency and magnitude of catastrophic events, we expect economic losses to grow over time,” the analyst said.
