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EU regulators seek to plug climate ‘insurance gap’

Posted On: Apr. 24, 2023 8:42 AM CST


(Reuters) — Issuing catastrophe bonds and setting up public-private partnerships could help plug the “insurance gap” to better cover damage from climate change, according to a discussion paper from the European Central Bank and European Union insurance regulators released Monday.

Only a quarter of EU climate-related catastrophe losses are insured, creating risks to the economy and financial stability from uninsured businesses and households not being able to recover quickly from extreme events like fire or flood, the paper from the ECB and EU insurance watchdog EIOPA said.

Without action, the insurance gap could widen as more frequent and intense events lead to higher premiums and impact credit supply from banks in high-risk areas.

Direct aggregate catastrophe losses in the EU totaled €487 billion ($535 billion) between 1980 and 2020, and insurer Swiss Re has estimated there were $120 billion of catastrophe losses globally last year.

Six consecutive years of above-average losses have driven property catastrophe reinsurance prices up, with European rates increasing by 30% at January 2023 renewals, international broker Howden has said.

“In order to efficiently protect our society, we need to address the concern of the increasing insurance protection gap by proposing and finding appropriate solutions,” EIOPA chairperson Petra Hielkema said in a statement.

Actions could include incentivizing people and businesses to mitigate against climate-related disasters by offering discounts on policies, the paper said.

Issuing catastrophe bonds could help insurers pass on some of the risk to the capital market to keep a lid on premiums, the paper said. Taking action would speed up pay-outs after disasters to avoid a hit to the economy.

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 paper said.

Responses to the paper will be discussed at a workshop on May 22.