Damage following floods in Valencia, Spain in October 2024. Losses from extreme weather are expected to grow. Photo: Vincente Sargues / Shutterstock
Insurance firms are at increasing risk from the physical risks of climate change which could become a source of systemic risk, the European Central Bank (ECB) warned in its latest financial stability report.
Natural disasters have resulted in a preliminary estimate of €30bn in economic losses in 2024. Only €13bn was insured, the central bank noted.
Historically, most economic losses in the euro area have been uninsured. This insurance protection gap could widen even further as policy prices increase due to rising insured losses. This in turn could make coverage unaffordable and erode insurance underwriting.
The widening gap is also a systemic risk, as physical damage could impact the value of assets and property, leading to repricing in areas more prone to extreme weather events from climate change. It could also increase the burden on the public sector, the central bank warned.
“This highlights the importance of taking policy action aimed at reducing the climate insurance protection gap,” the ECB stated.
Marika Carlucci, senior EU policy officer at campaign group ShareAction, said it was disappointing that the report just focused on physical risk as insurers also face risks from the transition to a green economy, such as investment losses from sectors like fossil fuels that fail to adapt.
“Insurers are not solely passive victims of climate change. They have a critical role to play in building resilience and reducing climate-related risks to the benefit of their businesses, policyholders and financial stability more broadly,” she said.
While she agreed with the ECB on the need to reduce the insurance protection gap, she is also keen to see capital requirements introduced for insurers’ investments to reflect their risk, including from fossil fuels.
In November, the European Insurance and Occupational Pensions Authority (EIOPA) recommended that insurers set aside more capital for fossil fuel investments.
Julia Symon, head of research and advocacy at Finance Watch, said the greater emphasis on these risks than in past financial stability reports was “a worrying trend” that reflects the increased losses from climate change.
The ECB’s review of the spillover effects to other sectors of the financial system also shows that the impact of climate change will likely be higher, she said.
“As the EU debates rolling back its sustainable finance framework, the ECB report serves as a stark warning. Climate risks are not receding, they are accelerating. The insurance sector must be both resilient to climate risks and part of the solution to the growing protection gap,” she said in reference to the EU’s ongoing omnibus proposal.
But simply acknowledging the systemic risk isn’t enough, said Fiona Hauke, a researcher at Urgewald.
“We need all hands on deck,” she said, highlighting the tools the ECB has available such as introducing a green interest rate or integrating climate change in its monetary operations.
“Sadly, [the ECB] remains overly focused on perfecting its risk assessments.”
This page was last updated June 9, 2025
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.
