Addressing Climate Risks: ECB and EIOPA Call for Enhanced Disaster Insurance Coverage
In a compelling joint working paper, the European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) have issued a critical call to action for Europe’s insurance sector: close the widening insurance gap in natural disaster protection.
The report warns that climate-related risks are intensifying across the continent, yet insurance coverage for these disasters remains alarmingly low. As extreme weather events become more frequent and severe, the lack of adequate financial protection could undermine the long-term economic stability of both households and nations.
The Climate Risks Coverage Deficit in Europe
According to the ECB and EIOPA, only 25% of losses from natural disasters such as floods, wildfires, and storms are insured in Europe . In some EU member states—including Lithuania, Hungary, Bulgaria, Italy, Greece, Malta, and Cyprus —this rate drops below 5%, revealing a substantial climate risk protection gap .
This deficit leaves individuals, businesses, and governments exposed to the growing financial burden of climate-related disasters. Without insurance, the cost of rebuilding falls largely on state aid, which is often insufficient or delayed, putting economic recovery at risk.
Why Europeans Underestimate Climate Risks
One of the key insights from the report is that many individuals and businesses across the EU misjudge the severity and cost of climate risk . There’s a common assumption that government relief will step in after a disaster, which diminishes demand for private insurance coverage.
This low risk perception, combined with limited awareness and underdeveloped insurance products in certain markets, perpetuates the cycle of underinsurance. In effect, it discourages insurers from innovating and expanding offerings in catastrophe coverage.
Climate Risks Intensifying Due to Global Warming
The urgency of closing the insurance gap is amplified by the increasing impact of climate change on natural disasters . Europe is already witnessing more frequent and intense climate risk events , from deadly floods to scorching wildfires.
Recent examples include:
Historic flooding in Germany and Belgium in 2021 , causing billions in damages and loss of life.
Wildfires in Southern Europe in 2023 , particularly in Greece and Italy, leading to widespread evacuations and destruction.
Most of these losses remain uninsured, demonstrating the inadequacy of existing protection mechanisms and the increasing exposure of EU economies to climate risk.
ECB and EIOPA Recommendations to Tackle Climate Risks
To address these growing threats, the ECB and EIOPA have laid out a multi-pronged strategy that encourages insurers and governments to work together in boosting coverage and awareness of climate risk. Their key recommendations include:
1. Incentivizing Climate Risks Coverage Through Premium Discounts
Insurers should offer discounted premiums to households and businesses that adopt risk mitigation strategies, such as flood-proofing buildings or installing fire-resistant infrastructure. These financial incentives can boost participation and reduce future claims.
2. Expanding the Use of Catastrophe Bonds
By increasing the availability of catastrophe (cat) bonds , insurers can transfer portions of climate risk to the capital markets. This financial innovation helps insurers manage large losses more effectively while providing greater liquidity during major disasters.
3. Encouraging Public-Private Partnerships to Manage Climate Risks
Governments and insurers must collaborate to create resilient public-private insurance frameworks . Countries like France and Spain already benefit from such models, where state-backed reinsurers help support coverage for catastrophic events.
The ECB and EIOPA recommend expanding these frameworks across the EU to create a more uniform and effective response to climate risk.
4. Creating an EU-Wide Public Insurance Scheme for Climate Risks
An ambitious proposal includes the establishment of a pan-European disaster insurance program . This would act as a backstop for national schemes and ensure a consistent level of coverage across all EU member states, especially those with underdeveloped insurance markets.
Broader Economic Implications of Unaddressed Climate Risks
The insurance gap is not just a concern for policyholders—it’s a macroeconomic stability issue . As natural disasters increase in frequency and scope, the fiscal burden on governments will grow, threatening national budgets and recovery capabilities.
Furthermore, underinsurance limits the ability of local economies to bounce back after disasters. Small and medium-sized enterprises (SMEs), in particular, are vulnerable, as they often lack both insurance coverage and the capital reserves needed for recovery.
A Call for Climate Risks Awareness and Innovation
The ECB and EIOPA emphasize that now is the time for insurers to embrace innovation and risk-based pricing . By adopting new technologies like AI, predictive modeling, and location-specific risk assessments , insurers can offer tailored products that make disaster protection both accessible and affordable.
Public education is also key. Raising awareness about the true cost of climate risk and the benefits of insurance can help overcome behavioral biases and foster a culture of preparedness.
Conclusion: Time for Unified Action on Climate Risks
Europe faces a growing climate risk insurance gap that threatens economic resilience and public welfare. With only a quarter of natural disaster losses currently insured, the continent remains underprepared for the challenges ahead.
The ECB and EIOPA have issued a comprehensive and actionable blueprint. Whether through premium incentives, cat bonds, public-private partnerships , or an EU-wide insurance program , the path to closing the protection gap is clear.
Insurers, regulators, and governments must now work in concert to transform this roadmap into reality. By doing so, Europe can not only mitigate financial losses from natural disasters but also strengthen its long-term climate resilience and economic security.
