Policy options to reduce the climate insurance protection gap

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Acknowledgements

This discussion paper benefited from contributions by the following listed authors.

Nicholai Benalal

European Central Bank, Frankfurt am Main, Germany; email: Nicholai_Alexander.Benalal@ecb.europa.eu

Marien Ferdinandusse

European Central Bank, Frankfurt am Main, Germany; email: Marien.Ferdinandusse@ecb.europa.eu

Margherita Giuzio

European Central Bank, Frankfurt am Main, Germany; email: Margherita.Giuzio@ecb.europa.eu

Sujit Kapadia

European Central Bank, Frankfurt am Main, Germany; email: Sujit.Kapadia@ecb.europa.eu

Miles Parker

European Central Bank, Frankfurt am Main, Germany; email: Miles.Parker@ecb.europa.eu

Linda Rousová

European Central Bank, Frankfurt am Main, Germany; email: Linda.Fache_Rousova@ecb.europa.eu

Hanni Schölermann

European Central Bank, Frankfurt am Main, Germany; email: Hanni.Schoelermann@ecb.europa.eu

Elisa Telesca

European Central Bank, Frankfurt am Main, Germany; email: Elisa.Telesca@ecb.europa.eu

Pär Torstensson

European Central Bank, Frankfurt am Main, Germany; email: Paer_Niclas.Torstensson@ecb.europa.eu

Casper Christophersen

European Insurance and Occupational Pensions Authority, Frankfurt am Main, Germany; email: Casper.Christophersen@eiopa.europa.eu

Hradayesh Kumar

European Insurance and Occupational Pensions Authority, Frankfurt am Main, Germany; email: Hradayesh.Kumar@eiopa.europa.eu

Luisa Mazzotta

European Insurance and Occupational Pensions Authority, Frankfurt am Main, Germany; email: Luisa.Mazzotta@eiopa.europa.eu

Marie Scholer

European Insurance and Occupational Pensions Authority, Frankfurt am Main, Germany; email: Marie.Scholer@eiopa.europa.eu

Pamela Schuermans

European Insurance and Occupational Pensions Authority, Frankfurt am Main, Germany; email: Pamela.Schuermans@eiopa.europa.eu

Dimitris Zafeiris

European Insurance and Occupational Pensions Authority, Frankfurt am Main, Germany; email: Dimitris.Zafeiris@eiopa.europa.eu

© European Central Bank, 2023

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Website www.ecb.europa.eu

For specific terminology please refer to theECB glossary(available in English only).

PDF ISBN update identifier, ISSN update identifier, doi:update identifier, update identifier

[1] See EU Adaptation Strategy” on the European Commission’s website.

Policy options to reduce the climate insurance protection gap

[2] Catastrophe insurance is an umbrella term to refer to insurance cover against a wide range of highseverity events, including both natural and human-made disasters. In the context of this discussion paper, catastrophe insurance refers to insurance (private or public) against weather and climate-related natural disasters whose impact is expected to worsen as a result of climate change. It also includes secondary perils”, i.e. events that occur with higher frequency but with moderate severity and could either occur independently (such as thunderstorms) or as a secondary effect of a major event (such as hurricane-induced precipitation).

[3] See IAIS and SIF (2021). Some insurers recently announced their plans to cut natural catastrophe coverage, as the incidence of natural catastrophes exceeds what models have been anticipating. See, for example, InsuranceERM (2023).

[4] See EEA (2020).

[5] Property insurance contracts in Europe are often multi-risk and cover all or a subset of weather-related perils (EIOPA, 2022). Actual coverage and market practices differ between countries, including within Europe. For instance, in some countries, storm/hail, flood and/or wildfire coverage may be included in property insurance contracts by market practice or by law, while in others this may not be the case. In addition, insurance policies can offer insurance protection for all or only a subset of property-related losses (i.e. building, content and business interruption-related losses).

Policy options to reduce the climate insurance protection gap Potential policy measures to reduce the climate insurance protection gap the ladder approach

[6] See EIOPA (2021a).

Policy options to reduce the climate insurance protection gap reduce the climate insurance protection gap

[7] See FORTIFIED Solutions”, IBHS and Regulatory Framework for FORTIFIED Insurance Incentives”, IBHS.

[8] See EIOPA (2023).

[9] Proportional reinsurance involves compensation to the reinsured in proportion to their losses, whereas non-proportional reinsurance, such as stop-loss reinsurance, compensates the reinsured beyond a specified level of loss (but up to a limit).

Policy options to reduce the climate insurance protection gap

[10] See EIOPA (2021a).

[11] The sponsor” is the party that cedes the insurance risk. This is different from the SPV, which is set up by or on behalf of the sponsor and is the issuer of a cat bond.

[12] See Financial Protection Forum (2021).

the ladder approach

[13] See BMA (2021).

[14] See Insurance Authority of Hong Kong (2021).

[15] See MAS (2021).

[16] See Ando et al. (2022).

Potential policy measures to

[17] In some cases, particularly in less-developed countries, the international community provides assistance through specific loans and aid (e.g. from the World Bank). In the EU, countries can also apply to the EUSF for grant funding after natural disasters, as discussed further in Section 3.4.

Policy options to reduce the climate insurance protection gap

[18] See, for example, Aligishiev et al. (2022).

[19] For a conceptual framework on how to include climate change effects on growth and public finances in public debt sustainability analysis, see European Commission (2020a).

[20] Initiatives to improve climate-related governance standards include the Task Force on Climate-related Financial Disclosures, which is supported by many companies and central banks, but only a few EU Member States. The Inter-American Development bank has developed an Index of Governance and Public Policy in Disaster Risk Managementfor Latin American countries.

Policy options to reduce the climate insurance protection gap

[21] Major disasters are defined as disasters incurring direct damage above €3 billion in 2011 prices, or

0.6% of gross national income (GNI), or 1.5% of a NUTS 2 region’s GNI. See Council Regulation (EC) No 2012/2002 of 11 November 2002 establishing the European Union Solidarity Fund (OJ L 311, 14.11.2002, p. 3).

[22] Determined under Council Regulation (EC) No 2012/2002.

[23] See European Commission (2023).

[24] ibid.

Potential policy measures to

[25] In addition to EU Member States, countries negotiating to join the EU can also apply for EUSF funding.

Policy options to reduce the climate insurance protection gap

[26] See, for instance, Lenaerts et al. (2022).

Policy options to reduce the climate insurance protection gap reduce the climate insurance protection gap

[27] Cohen and Werker (2008) find that expectations of international aid following a disaster reduce countries’ investments in disaster preparedness. Similarly, Lewis and Nickerson (1989) show theoretically that federal aid for disaster relief reduces individuals’ expenditure on protecting their property from harm. Federal aid can also create adaptation-related moral hazard in other contexts. For example, Annan and Schlenker (2015) demonstrate that federally subsidised yield guarantees reduce farmers’ incentives to adapt to extreme heat.

Policy options to reduce the climate insurance protection gap

[28] The resulting adaptation is estimated to reduce the damage from climate change by approximately 30% and the associated welfare costs by approximately 5% (Fried, 2021).

Policy options to reduce the climate insurance protection gap

[29] See ECB (2022a).

[30] See EU Adaptation Strategy” on the European Commission’s website.

[31] See European Commission (2021a).

[32] See European Commission (2020b).

[33] See European Commission (2021b).

[34] See EIOPA (2021b).

Complementarity with wider EU policy initiatives

[35] See Born et al. (2021).

[36] See, for example, the proposed amendments to Article 208, paragraphs 3b and 5, in the review of the Capital Requirements Regulation, aimed at (i) reinforcing the requirement for banks to monitor the insurance of immovable properties taken as credit protection against the risk of damage, including from physical risk, and (ii) clarifying the relevance of improvements to the resilience, protection and adaptation to physical risks of the building or housing unit”. In addition, in the context of the Thematic Review on Climate and Environmental Risks (ECB, 2022b), the ECB identified as good practice for banks to consider the availability of insurance schemes and government protection schemes in bank lending policies.

Complementarity with wider EU policy initiatives