The frequency and severity of climate-related events is increasing and causing a significant impact on the total economic losses, people, business and infrastructure. Analysis show that only limited economic losses are insured in Europe creating a climate protection gap. The European Commission has established the so-called "Climate Resilience Dialogue", a temporary group of stakeholders (e.g., supervisors, branch- and consumer organisations, insurance industry) to discuss ways to narrow the climate protection gap and increase the resilience of the economies and societies to the global effects of climate change.
After preparing an interim report in July 2023, the Climate Resilience Dialogue delivered its final report in July 2024 providing insights and learnings from discussions with (inter alia) the insurance industry, putting forward actions and good practices that help meet the needs of different types of stakeholders (the Report). Below we will discuss the most relevant findings of the Climate Resilience Dialogue for insurers and policyholders.
Background
Extreme weather events and the (devastating) effects are becoming more evident. At the same time only 19.5% of the economic losses from extreme climate-related events in Europe were insured in the period 1980-2022 (see the study of the European Environment Agency). According to the European Insurance and Occupational Pensions Authority (EIOPA) this demonstrates the relatively large climate protection gap at EU level.
To reduce this gap mitigating and adapting measures are incredibly important. EIOPA welcomes the Report of the Climate Resilience Dialogue as it provides relevant insights how to mitigate climate change and adapt to its effects.
Report
The climate protection gap is defined in the Report as: "the difference between economic losses and insured losses from the materialisation of climate-related risks".
The Report has identified the following weather events as most pertinent climate-related risks: floods, wildfire, heatwaves, drought, hail and storms. These events all have immediate, long(er)-term impacts and are often interlinked with each other causing a severe impact on the economic losses. Research shows that the frequency of extreme weather events worldwide has tripled, resulting in economic losses of EUR 270 billion in 2023 (see the Swiss Report).
Key contributing factors of the climate protection gap
The Report identifies shortcomings in risk awareness, which is often related to insufficient access to relevant information. To be aware of the risks, it is necessary to be able to properly assess them. Data availability is crucial to perform proper risk assessments. The challenges for these assessment are limited available data relating to a lack of open-source data, transparent underlying methodology and assumptions, and comparability of data sources.
Another contributing factor to the gap is the affordability of the product (i.e., the relationship of the premium to total disposable income). Low customer demand for insurance (e.g., due to the lack of risk awareness) can indirectly lead to higher premiums since, as a result, insurers are less able to spread risks effectively. At the same time, increasing economic losses caused by climate-related events impacts the exposure and with that the premiums may go up, resulting in issues of affordability.
The Report also identifies trust as a potential factor of the climate protection gap. Insurance is an intangible product, and its purchase relies heavily on trust in insurers to fulfil potential claims.
The related economic losses from the materialisation of the climate-related events, if not accompanied by the same pace of an increase of insurance coverage and investment in climate resilience, may further widen the already relatively large climate protection gap in Europe. To address this problem, the Climate Resilience Dialogue has presented possible solutions and actions in the Report.
Solutions to close the climate protection gap:
Suggested solutions which can be implemented by different stakeholders (e.g., public authorities, insurance companies and consumers):
- Promoting risk awareness: access to accurate
information is key in increasing risk awareness. The Report
provides for recommendations to develop (more) accessible
information tools and campaigns providing clear and easily
understandable information to customers on the risks and the
potential risk reduction measures. In addition, the tools should be
tailor-made because climate risks differ greatly depending on the
geographic location.
The Climate Resilience Dialogue acknowledges that supervisory authorities can play a role in raising awareness by socialising reliable information sources or developing guidance on climate and natural catastrophe risks and adaptation measures. EIOPIA is currently preparing a blueprint for climate risk sheets, to serve as a practical tool to enhance risk awareness and the understanding of related prevention measures among society and the industry, with the aim of reducing insured losses and supporting the take-up of insurance coverage. The blueprint is expected in Q4 2025 (see Work Programme 2024-2026).
- Improving risk assessment: to improve the risks
assessment, the Climate Resilience Dialogue suggests creating a
EU-wide public platform to ensure availability of insured loss data
and improve modelling of risks with better access to data. EIOPA
has committed to have yearly updates of the natural catastrophe
insurance protection gap dashboard (EIOPA 2023). Also, it urges supervisory
authorities to enhance forward looking assessments of
climate-related risks in their supervision.
- Enhancing affordability of the insurance cover: one measure to support the affordability of insurance cover is the implementation of adaptation measures by insurance companies and their reflection in the insurance premium, using risk-based pricing as a key tool to send risk signals and promote resilience. Another solution could be mandatory insurance coverage against climate risks and mandatory offer of climate-related insurance.
- Reduce mistrust: according to the Report, it is
important to cater for product simplicity, reliability and clarity
of the language on climate-related risks in the policy conditions
and product information. Adequate disclosures can help overcome
barriers to take out an insurance and enhance the level of
(mis)trust in the insurance industry. It is important for insurers
to address this in the product approval and review process.
Conversely, policyholders should take a close look at the coverage
and exclusions in their insurance policies.
- Intensify collaborations between stakeholders and supervisory authorities: efficient communication between various stakeholders (i.e., the insurance industry) and competent authorities are considered essential to close the gap. A (more) coordinated approach with multi-level and cross sectoral corporation may help to combat the effects of climate change. This is also acknowledged by EIOPA (see the Link). In addition, the Climate Resilience Dialogue encourages supervisory authorities to continue the dialogue and exchange information to ensure convergence and to exploit best practices.
Conclusion
The losses from extreme climate-related events will continue to occur in the future thereby expanding the current climate protection gap. The Report demonstrates the urgent need for coordinated efforts to close the climate protection gap. By improving risk awareness, enhancing risk assessments, and promoting effective risk reduction measures, the European Union could build greater resilience against the impacts of climate change. While the European Commission welcomes the Report and will reflect on the solutions presented in the report in its next mandate, insurance companies and policyholders can already reflect on their products and insurance coverage to consider their climate coverage gap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.