Reduce ‘climate insurance protection gap’, say ECB and EIOPA

April 26, 2023|Written by |European Central Bank

Two European financial bodies have called for governmental action to increase the use of climate catastrophe insurance.

In a new report released earlier this month, the European Central Bank (ECB) and European Insurance and Occupational Pensions Authority (EIOPA) explained that only one quarter of climate-related catastrophe losses in the EU are currently insured.

Catastrophe insurance refers to insurance against high-severity climate-related disasters, and the uninsured remainder is what they call the “climate insurance protection gap”. This gap, the report notes, could lead to adverse impacts on economic growth and inflation, as climate risks can cause “losses related to changes in short and medium-term economic production and consumption”.

In a statement accompanying the report, Luis de Guindos, vice president of the ECB, said that “we need to increase the uptake of climate catastrophe insurance to limit the growing impact of natural disasters on the economy and the financial system”. He also noted the need to “reduce losses in the first place” by ensuring “a smooth and speedy green transition”.

Petra Hielkema, chair of EIOPA, added that “to efficiently protect our society, we need to address the concern of the increasing insurance protection gap by proposing and finding appropriate solutions”.

The ECB and EIOPA propose a ladder approach to addressing the insurance gap. The organisations would keep the private sector responsible for insuring against high frequency, low impact climate events while having national governments and, ultimately, the EU insure against low frequency, high impact events.

Diagram showing levels of catastrophe insurance
© ECB

The report contemplates governments working to promote a variety of reinsurance and risk transfer opportunities at each loss layer, illustrated in the chart above. Recognising that private insurance companies cannot insure against deep and widespread losses following localised natural disasters, the authors encourage governments to bolster private reinsurance and catastrophe bonds that can be backstopped by national governments.

For those climate events that are “very large disasters” crossing national boundaries, European fiscal assistance could “close the climate insurance protection gap further”. At each level, it is incumbent upon governments to provide incentives for adaptation and risk mitigation measures.

This report is the latest effort by the ECB to address climate-related financial risks. The central bank requires regulated institutions under its jurisdiction to provide climate-related disclosures, and this month announced that 16 eurozone banks, or 15% of those evaluated, are failing to adequately disclose information related to their climate-related risks, as well as how they intend to address those risks.

The ECB is also conducting climate stress tests, the most recent of which found that the combination of higher carbon prices and extreme weather events would result in losses of over €70bn, which the central bank noted was likely to be a significant underestimate.

This page was last updated April 26, 2023

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