The climate insurance protection gap
Extreme weather and climate events can have significant macroeconomic implications. They can also affect financial stability and weaken the financial position of governments that often step in to provide relief or cover losses in the aftermath of a catastrophe. While the effects of such events can be mitigated by catastrophe insurance, only about a quarter of climate-related catastrophe losses are currently insured in the EU. In some countries, the figure is less than 5% (see chart). Moreover, this climate insurance protection gap is expected to widen further owing to the increasing risk posed by climate change.
Chart
The share of insured economic losses related to natural catastrophes in Europe is low and could decline in the medium to long term
Average share of insured economic losses caused by natural catastrophe events in Europe
(1980-2023, percentages)
Sources: EIOPA dashboard on insurance protection gap for natural catastrophes, European Environment Agency (EEA) CATDAT.
The European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) have worked together on how to enhance the insurance of European households and companies against climate-related catastrophes such as floods and wildfires. This work resulted in two papers aimed at fostering debate on how to tackle the climate insurance protection gap.
Our joint discussion paper published in April 2023 provided evidence of the economic significance of this gap and advocated a ladder approach to natural catastrophe insurance to help reduce it. This multi-layered approach suggested to involve both the private and public sectors at national and EU-level. The paper received feedback from various stakeholders which motivated further work.
A follow-up paper published in 2024 proposed a possible EU-level approach to address the gap. Building on existing national and EU structures, the proposed approach would rest on two complementary pillars:
an EU public-private reinsurance scheme to increase insurance for natural catastrophes by pooling private risks
an EU fund for public disaster financing to reinforce public disaster risk management in Member States
The complementarity of the two pillars would ensure the efficient use of private and public sector funds for natural disaster payouts and encourage ex ante risk mitigation. The two -pillar system further develops the ladder approach, particularly its top layer, while fostering and safeguarding solutions at the national level, providing incentives for preventive measures and reducing moral hazard.
The 2023 and 2024 joint ECB-EIOPA papers are part of the ECB’s climate agenda and its work on improving the overall understanding of climate-related risk. The policy options presented should be complementary to ambitious mitigation policies aimed at tackling climate change and reducing associated catastrophe risks.
Two-pillar EU-level approach
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EU public-private reinsurance scheme
The first pillar would increase the insurance coverage for natural catastrophe risk. By pooling private risks across the EU and across perils, this scheme would exploit economies of scale and diversify the coverage of high risks at European level. It would be funded by risk-based premiums from (re)insurers or national insurance schemes.
EU public disaster fund
The second pillar would reinforce public disaster risk management in Member States. Financed by Member State contributions, this fund would help rebuild public infrastructure following natural disasters, subject to Member States having implemented agreed risk mitigation measures prior to the event.