Discover how the European Central Bank (ECB) and EIOPA are paving the way for a robust climate risk insurance system in the EU, addressing natural disaster costs and protection gaps.
A Dual Approach to Climate Risk Insurance
The European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) have introduced a comprehensive policy framework aimed at tackling the rising costs of natural disasters across Europe. The joint proposal centers on two key pillars:
- A Public-Private Reinsurance Scheme at the EU Level
- An EU Fund for Public Financing of Natural Disasters
These initiatives aim to close the protection gap for individuals and businesses by enhancing climate risk insurance coverage through a blend of national and European resources.
also read For Europe, adaptation to climate change is still a black hole
The Cost of Natural Disasters in Europe
The economic impact of climate change-driven natural disasters is accelerating in Europe, both in frequency and severity. According to the European Environment Agency, natural disasters caused approximately €900 billion in direct economic losses between 1981 and 2023. A staggering 22% of these losses occurred in just the past three years.
Yet, only 25% of losses tied to extreme weather events in the EU were insured during this period—a proportion that continues to decline.
A Closer Look at Italy
Italy faces an even starker reality. In 2023, insured damages in Italy reached an all-time high of over €6 billion. Of this, €5.5 billion was attributed to severe weather events, while €800 million stemmed from catastrophic floods in Emilia-Romagna and Tuscany.
Despite these figures, climate risk insurance remains alarmingly low:
- Only 6% of Italy’s 35.3 million homes are insured against such events.
- Just 5% of the 4.5 million businesses have climate risk insurance coverage.
However, regulatory changes are on the horizon. By 31 March 2025, all Italian companies will be required to obtain insurance against catastrophic events.
The Path Forward: BCE-EIOPA Recommendations
To bridge the insurance gap, the ECB and EIOPA propose leveraging existing national and EU frameworks while fostering collaboration between public and private sectors. Their approach focuses on two complementary mechanisms:
1. The Public-Private Reinsurance Scheme
This scheme would:
- Expand insurance coverage for natural disaster risks.
- Pool private risks at the EU level, taking advantage of economies of scale and diversification.
- Operate on risk-based premiums collected by (re)insurers or national insurance schemes.
2. The EU Disaster Financing Fund
The fund would:
- Enhance disaster risk management in member states and support the reconstruction of public infrastructure.
- Require states to adopt risk mitigation measures as a condition for access.
- Be funded through contributions from member states.
Benefits of the Proposed System
The dual-track approach builds on the proven success of public-private insurance models already in use in some EU countries. Key advantages include:
- Closing the insurance gap through shared risk pooling at the European level.
- Boosting risk management efficiency via diversification and collective funding.
- Strengthening resilience against systemic risks while reducing economic losses.
By limiting financial damage and enhancing preparedness, the BCE-EIOPA proposal aims to improve Europe’s economic stability and safeguard its future against climate-related challenges.
As climate risks escalate, the need for innovative, scalable solutions has never been more urgent. The BCE-EIOPA proposal offers a bold and practical roadmap toward a more resilient and insured Europe
