EU regulators try to close climate ‘insurance gap’

(Reuters) — Issuing disaster bonds and establishing public-private partnerships could help close 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 on Monday.

Only a quarter of the EU’s 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 such as fire or flood, according to the paper by 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 affect credit provision from banks in high-risk areas.

Direct total catastrophe losses in the EU amounted to €487 billion ($535 billion) between 1

980 and 2020, and insurer Swiss Re has estimated that there were $120 billion in catastrophe losses globally last year.

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

“To effectively protect our society, we need to address concerns about the increasing insurance coverage by proposing and finding appropriate solutions,” EIOPA President Petra Hielkema said in a statement.

Measures could include incentives for people and businesses to mitigate climate-related disasters by offering discounts on policies, the paper said.

Issuing catastrophe bonds can help insurers transfer some of the risk to the capital market to keep a lid on premiums, the paper said. Taking action would speed up disbursements after disasters to avoid the economy being hit.

Insurance schemes at the national level could be complemented by an EU-wide public scheme that ensures sufficient funds are made available to European countries for rebuilding after rare, large-scale climate-related disasters, the paper said.

Answers to the essay will be discussed at a workshop on May 22.