The EU has a problem with climate catastrophe insurance: only a quarter of the losses from climate-related disasters are covered. Greater coverage could reduce the economic damage that results from them, a joint ECB-EIOPA post reads, overviewing the ways to make this happen.

Drought affected two-thirds of the European Union in 2022, likely the worst episode in 500 years. Agricultural production withered, river transport was disrupted and hydroelectric power generation fell, which exacerbated the energy crisis. Just a year earlier, severe flooding across the continent killed hundreds and caused substantial damage. Climate change will make catastrophes like these more frequent and more severe.

Putting the brake on climate change by accelerating the green transition remains vital. But we also need policies to lessen the impact of catastrophes when they occur. Insurance plays an important role in this. By promptly providing funds for reconstruction, insurance allows economic activities to return to pre-catastrophe levels more quickly. So high rates of coverage and speedy pay-outs can substantially mitigate the economic damage. They can also reduce financial stability risks and lower the cost to taxpayers of government relief to cover uninsured losses.

So, are we covered when disaster strikes? No, the EU actually has a major climate insurance protection gap. Only a quarter of climate-related catastrophe losses are insured. In some countries, the figure is less than 5% Moreover, the growing effects of climate change mean that coverage is likely to shrink as rising premiums choke demand and insurers withdraw from particularly exposed areas.

Read here the full article signed by a joint group of ECB-EIOPA authors.