Climate: insurers urged to better cover environmental disasters

The European Central Bank (ECB) and the European Insurers Authority (EIOPA) on Monday called for closing the loss coverage gap resulting from climate-related disasters in the EU, which is likely to increase further in the future.

Only a quarter of claims due to climate-related disasters in the EU, storms, floods, forest fires, are currently insured and this deficit is expected to widen as the impact of climate change increases, explain the two institutions in a joint working document.

In the EU, many residents underestimate the costs of climate-related damage or prefer to rely on support from governments, according to the ECB and EIOPA.

“We need to increase the use of weather catastrophe 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. communicated.

“We must respond to the growing insurance protection gap by proposing and finding appropriate solutions,” insisted European Insurers Authority President Petra Hielkema.

Placed on the front line, insurers should offer attractive offers to households and businesses, including, for example, discounts if policyholders take measures to reduce their exposure to climate risk, believe the two institutions in their working document.

The next step would be to expand the issuance of “catbonds” (catastrophe bonds), which allow insurers to transfer the risk associated with certain natural events to the market.

Along the same lines, governments could set up “public-private partnerships”, such as those in France, Spain and the UK.

In these partnerships, insurers and reinsurers take on some of the risk alongside the government, while policyholders can be encouraged to adapt to risk, thereby reducing moral hazard.

Finally, insurance schemes at 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.

Floods in the summer of 2021 in Europe caused damages totaling 46 billion euros in costs, of which only 11 billion euros were insured. Germany has pledged up to €30 billion in response to fund reconstruction efforts.