European Central Bank calls for greater insurance coverage of climate-related losses

European Central Bank calls for greater insurance coverage of climate-related losses
Credit: Belga / Laurie Dieffembacq

The European Central Bank (ECB) and the European insurance authority (EIOPA) on Monday called for an increase in coverage for claims resulting from climate-related disasters in the EU, which is likely to increase further in the future.

Only a quarter of claims from climate-related disasters in the EU – storms, floods, forest fires – are currently insured and this deficit is expected to grow as the impact of climate change increases, the two institutions say in a joint working paper.

Many people in the EU either underestimate the costs of climate-related damage or prefer to rely on government support, the ECB and EIOPA say.

“We need to increase the use of weather insurance to limit the growing impact of natural disasters on the economy and the financial system,” ECB Vice-President Luis de Guindos said in a statement.

“We need to respond to the growing deficit in insurance protection by proposing and finding appropriate solutions,” insisted European Insurers’ Authority president Petra Hielkema.

Insurers should offer attractive deals to households and businesses, including discounts if policymakers take measures to reduce their exposure to climate risk, the two institutions say in their working paper.

This would be followed by an expansion of “cat bonds” (catastrophe bonds), which allow insurers to transfer the risk of certain natural events to the market.

In the same vein, governments could set up “public-private partnerships” along the lines of those implemented in France, Spain and the UK.

In such partnerships, insurers and reinsurers take on part of the risk alongside the government, while policymakers can be incentivised to adapt to the risks, thereby reducing moral hazard.

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Finally, insurance schemes at the national level could be complemented by an EU-wide public scheme. It would ensure that sufficient funds reach countries for reconstruction after a major climate-related disaster.

The floods in the summer of 2021 in Europe caused damage totalling €46 billion in costs, of which only €11 billion was insured. In response, Germany committed up to €30 billion to fund reconstruction efforts.


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