The aftermath of a wildfire in Doñana National Park, Spain © Antonio Jordán
Climate adaptation measures are “essential” to address the insurance gap that exists in the EU, an EU-commissioned report has found.
“Adapting and mitigating climate change are key elements necessary to address insurance protection gaps, and without them, climate-related risks will only keep increasing and make insurance coverage unaffordable or unavailable,” the final report from the Climate Resilience Dialogue says.
Commissioned in 2021, the dialogue brought together various stakeholders, including those from the insurance sector, to provide recommendations on how EU member states can close the insurance gap.
Only 25% of climate-related losses in the EU are covered by insurance, with coverage as low as 5% in some countries, according to data from the European Insurance and Occupational Pensions Authority (EIOPA).
Climate adaptation needs not just to follow a catastrophic event but should be preventative and aligned with a just transition to avoid isolating vulnerable people, the report recommends.
“Insurance is considered one of the key elements of the ‘coping capacity dimension’ of climate risk,” it says.
Collaboration between the public and private sectors is one way to reduce the lack of insurance protection, especially through public-private partnerships. Public awareness is also needed through education campaigns to improve adaptation and awareness of climate risk insurance.
The report also highlighted the need for adequate databases to provide better modelling and risk assessments. The current catastrophe modelling market is dominated by larger commercial players which leads to a lack of coverage in some areas and can be unaffordable for smaller companies, not to mention a lack of transparency due to intellectual property concerns.
While open-source models could reduce costs, supervisors should understand the models used to make sure that proper risk assessments are being made. The report pointed out that the financial sector widely uses scenarios such as those from the International Panel on Climate Change and Network for Greening the Financial System, but there are some limitations as these models do not take into account all potential factors such as physical tipping points.
Following the report’s release, the Federation of European Risk Management Associations (Ferma) called on the European Commission to set up a permanent expert group. Typhaine Beaupérin, CEO of Ferma, said in a press release that such a group is necessary to put forward suggestions to the EU on how to narrow the climate protection gap “given the speed at which impacts from climate change are being felt across Europe.”
EIOPA welcomed the report and said it supports calls for public-private collaboration schemes as “they can promote risk prevention and adaptation, reduce the cost of the risk transfer ex ante and incentivise the supply of and demand for insurance”.
The report highlights the need for the insurance agency to consider making loss and exposure data from natural catastrophes publicly available. Meanwhile, EIOPA has been developing impact underwriting as one potential climate strategy, whereby insurers motivate clients to reduce their climate risk exposure. The agency said it is developing a tool to enhance risk awareness and knowledge of prevention measures “with the aim of reducing insured losses and supporting the take-up of insurance coverage”.
This page was last updated September 18, 2024
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
