EU Insurance Markets and Climate-Related Losses
The EU insurance markets stand to benefit significantly if recent proposals for a bloc-wide public-private reinsurance scheme addressing climate-related losses are successfully implemented. According to a comprehensive review by Fitch Ratings, as climate risks escalate, a state-backed reinsurance initiative could provide much-needed support to insurers and reinsurers, enabling them to maintain coverage in high-risk areas that they might otherwise avoid.
In December 2024, a joint paper published by the European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) unveiled a strategy aimed at bolstering the financial stability of insurers through the pooling of risks across the EU. This collaborative approach is expected to enhance diversification and resilience within the insurance sector. It draws inspiration from Spain’s Consorcio de Compensacion de Seguros (CCS), which has effectively stabilized the Spanish market by covering substantial disaster losses.
This proposed EU scheme is designed to support existing national systems rather than replace them, ensuring that they remain effective in managing risks. Government-backed catastrophe insurance schemes are crucial for mitigating the financial repercussions of natural disasters across Europe. Such programs offer a safety net for both insurers and policyholders, providing coverage for extraordinary risks including floods, earthquakes, and other natural events.
European Government-Backed Catastrophe Insurance Schemes
In Spain, the CCS operates as a state-managed insurer, funded through mandatory surcharges on insurance policies. France boasts a comprehensive system known as the Cat Nat scheme, supported by the state-owned CCR, which guarantees reinsurance for natural disasters. Conversely, Germany lacks a national catastrophe insurance scheme, compelling insurers to depend solely on private mechanisms. This variance illustrates the differing levels of state involvement in disaster risk management across Europe. While some nations prioritize comprehensive government-supported solutions, others lean more heavily on private market options.
As climate change intensifies the frequency and severity of natural disasters, the importance of these schemes in supporting insurance markets and ensuring community resilience becomes increasingly evident.
Comparison of Approaches
- Spain and France: Both countries have established robust government-backed schemes that significantly reduce financial volatility for insurers while ensuring widespread coverage for policyholders.
- Germany: Relies exclusively on private market mechanisms, resulting in increased financial vulnerability for insurers and leaving gaps in coverage for high-risk properties.
- Italy: Is working to bridge the coverage gap with an upcoming program aimed at small and medium-sized enterprises (SMEs), which will integrate state reinsurance through SACE alongside mandatory coverage.
The unpredictable nature of climate-related events may prompt insurers to withdraw from high-risk regions. Furthermore, a lack of awareness regarding risks and a reliance on government disaster aid can suppress insurance adoption among individuals and businesses. From 1981 to 2024, natural catastrophe-related extreme events resulted in approximately €900 billion in direct economic losses across the EU, with over a fifth of these losses occurring within the last three years (2021: €65 billion; 2022: €57 billion; NatCat in 2023: €45 billion). The devastating floods in central and eastern Europe, along with those in Spain in 2024, highlighted the formidable challenges posed by extreme weather to the EU and its member states.
These events underscored the critical need for emergency preparedness, risk mitigation, and adaptation strategies to prevent and reduce economic losses. They also emphasized the necessity for effective national insurance schemes to alleviate the financial burdens stemming from natural disasters and to address the expanding insurance protection gap that increasingly strains public finances.
Insurance Protection Gap for Natural Catastrophes
If adopted, the proposed scheme could significantly narrow the widening insurance protection gap for natural catastrophes. Despite the increasing frequency and severity of climate-related disasters, only about a quarter of economic losses from natural catastrophes in the EU between 1981 and 2023 were insured, and this share has been shrinking over time. The envisioned public-private reinsurance scheme aims to enhance the affordability and availability of insurance coverage for natural catastrophes. It would not only serve as a financial safety net for insurers but would also facilitate economic recovery following such disasters, thereby reducing fiscal burdens on governments resulting from uninsured losses.
The scheme is set to be funded through risk-based premiums collected from insurers and reinsurers, as well as contributions from national insurance schemes. The new EU strategy on climate change adaptation highlights that the affordability and insurability of natural catastrophe insurance coverage are likely to become increasingly pressing concerns. Research indicates that historically, only a quarter of total losses incurred due to extreme weather and climate-related events across Europe were insured, revealing a substantial protection gap. Improved climate projections further support the notion that future climate change will lead to increased climate-related extremes (e.g., heavy precipitation, droughts, floods) and, consequently, a widening protection gap if no proactive measures are taken.
Understanding the insurance protection gap and identifying its root causes is critical. EIOPA has developed a pilot dashboard to illustrate the insurance protection gaps associated with many natural catastrophes in Europe. Addressing these gaps cannot be solely achieved through increasing insurance penetration. It is evident that the most effective solution lies in reducing the underlying causes of climate change. The dashboard aims to highlight the drivers of such climate-related gaps, allowing for the identification of measures that will bolster society’s resilience in the face of natural catastrophes, while simultaneously promoting increased awareness and a science-based approach.
EU Public Disaster Risk Management
The initiative also proposes strengthening EU public disaster risk management by establishing a fund financed by member states to support the reconstruction of public infrastructure following natural disasters. Payouts from this fund would be contingent upon member states having implemented agreed-upon risk mitigation strategies. This dual approach, encompassing both reinsurance and public financing, is designed to mitigate macroeconomic and financial stability risks associated with uninsured losses by clarifying the division of responsibilities between the private and public sectors. It seeks to incentivize risk mitigation and adaptation efforts at both national and EU levels.
One significant challenge highlighted by these proposals is the issue of insurability and affordability in high-risk areas. Until robust state-backed reinsurance mechanisms are firmly established, insurers are likely to limit coverage in these vulnerable regions. This concern was echoed in a recent audience poll at Fitch’s Insurance Insights event in London, where 69% of participants indicated that reducing coverage in high-risk areas would be the most immediate consequence of climate change on the insurance sector by 2025. This sentiment underscores the urgent need for state-backed reinsurance to ensure the continued availability and affordability of insurance.
The floods in Spain in November 2024 exemplified the benefits of state-backed schemes in mitigating financial impacts on insurers. The CCS played a critical role in stabilizing the market by effectively compensating for flood-related damages.
Most Impact of Climate Change for the Insurance Industry in 2025
The complementarity of the proposed two pillars would ensure the efficient allocation of private and public sector funds for natural disaster payouts, while simultaneously encouraging proactive risk mitigation measures.
- First, this approach would improve cost efficiency by addressing risks ex ante across households, businesses, and governments. The two pillars would enhance risk pooling and provide incentives for risks to be managed at the lowest feasible level.
- Second, the approach acknowledges the primary role of the private insurance sector in covering the majority of damages incurred during disasters, thereby reducing the dependence on public financing for damage incurred by households and businesses. Third, and crucially, it is compatible with national initiatives aimed at improving insurance coverage through various schemes or funding solutions.
Simultaneously, the approach recognizes that governments retain specific responsibilities, including the reconstruction of public infrastructure. While each pillar could theoretically function independently as a stand-alone instrument, their combined implementation would reinforce each other, resulting in enhanced effectiveness.
Ideally, the two pillars should operate in tandem, fostering incentives for proactive risk mitigation and providing additional financial support for the highest loss layer of natural catastrophes, ultimately benefiting households, businesses, and governments alike.
FAQ: EU Public-Private Reinsurance Scheme for Climate-Related Losses
What is the proposed EU public-private reinsurance scheme?
The ECB and EIOPA have proposed a bloc-wide public-private reinsurance scheme aimed at addressing climate-related losses. This initiative seeks to enhance financial stability by pooling risks across EU member states, ensuring that insurers can continue to provide coverage in high-risk areas.
How would the scheme improve insurance availability?
By offering state-backed reinsurance, the plan aims to mitigate insurers’ financial risks, enabling them to maintain coverage in regions prone to natural disasters. This structure would help limit premium increases and prevent insurers from withdrawing from high-risk locations affected by escalating climate-related losses.
How does this compare to existing European catastrophe insurance schemes?
Spain and France have established government-backed schemes that stabilize their respective insurance markets. Spain’s Consorcio de Compensacion de Seguros (CCS) and France’s Cat Nat system provide reinsurance guarantees for extreme weather events. In contrast, Germany relies solely on private mechanisms, increasing financial exposure for insurers. Italy is in the process of developing a hybrid model specifically for small and medium-sized enterprises (SMEs), combining state-backed reinsurance with mandatory coverage.
What impact could this have on closing the insurance protection gap?
With only about 25% of economic losses from natural disasters in the EU between 1981 and 2023 insured, and this share declining, the proposed scheme would enhance affordability and coverage availability, thereby reducing the financial burden on governments and taxpayers when disasters occur.
How would the scheme be funded?
The proposal suggests funding through risk-based premiums paid by insurers and reinsurers, alongside contributions from national insurance schemes. This model aims to fairly distribute financial responsibility while ensuring sufficient funds are available for disaster recovery efforts.
What role does public disaster risk management play in this plan?
The initiative also includes the establishment of a fund dedicated to supporting the reconstruction of public infrastructure following natural disasters. Member states would contribute to this fund, with payouts contingent upon the implementation of agreed-upon risk mitigation measures. This approach would aid in managing economic losses while incentivizing preventive actions.
What challenges could affect the implementation of this scheme?
A key challenge involves ensuring insurability and affordability in high-risk areas. Without strong state-backed mechanisms in place, insurers may be compelled to limit coverage in vulnerable regions. A recent survey conducted by Fitch Ratings revealed that 69% of insurance professionals believe that reduced coverage in high-risk areas will be the most significant impact of climate change on the sector by 2025. This highlights the urgent need for effective reinsurance solutions.
AUTHORS: Alberto Messina – Senior Director, EMEA Insurance at Fitch Ratings, David Prowse – Senior Director, Credit Commentary & Research at Fitch Wire.
Source: Beinsure.com
