EIOPA and ECB call for increased uptake of climate catastrophe insurance

EIOPA and the ECB have released a joint discussion paper entitled Policy options to reduce the climate insurance protection gap, urging for an increase in the uptake of climate-related catastrophe insurance.
The joint discussion paper is part of EIOPA’s sustainable finance agenda, aiming to improve the overall understanding of climate-related risk. The discussion paper highlights that currently, only a quarter of EU climate-related catastrophe losses are insured, a figure that is expected to decrease as the impact of climate change grows, in some countries, the figure is below 5%.
The lack of climate catastrophe insurance can affect the economy and financial stability. If losses are not covered by insurance, the speed at which households and firms can resume their activities is reduced, slowing economic recovery. Lasting supply chain disruptions can also lead to spillovers from one firm to another and affect firms’ ability to pay back loans, thereby increasing banks’ exposures to credit risk. Additionally, the financial position of governments may be weakened if they need to provide relief to cover uninsured losses.
To foster insurance coverage, EIOPA and the ECB suggest that insurers should design their policies to encourage households and firms to reduce risk, for example by granting discounts for implementing effective mitigation or adaptation measures. To support the overall supply of insurance, the use of catastrophe bonds could be increased to pass on part of the risk to capital market investors.
Along the same lines, governments could set up public-private partnerships and backstops to partly cover the costs that insurers may incur in the event of major disasters. To protect themselves and ensure that public funds are used efficiently, governments should also provide strong incentives to reduce risks. National-level insurance schemes could be complemented by an EU-wide public scheme that makes sure sufficient funds are made available to European countries for reconstruction following rare, large-scale climate-related catastrophes.
The ECB and EIOPA welcomes comments and feedback on all aspects of the above discussion paper until 15 June 2023 via email to ecb_eiopa_staff_protection_gap@eiopa.europa.eu. A corresponding workshop with regulators, policymakers, academics, and representatives from the private sector will be held on 22 May 2023.