The ECB shines spotlight on dilemma linking climate and insurance

Brussels – Extreme weather events and insurance, a problem that is actually a conundrum. The European Central Bank continues in its reasoning on correlations between climate change and economic trends, through an analysis that highlights the insurance issue: on the one hand, people take out little insurance, while on the other, insurance could become increasingly expensive, discouraging businesses and families from taking out policies, which are nevertheless useful. 

ECB technicians warn: “Global warming is likely to increase the frequency and severity of extreme weather and climate events.” This means more and more damage, and increasingly costly damage at that. However, awareness of the problem and the need to take action is not the same across the EU and its eurozone. “Insurance coverage for disasters is fragmented, and there is currently a substantial gap in protection,” reports the European Central Bank. For example, “less than a quarter of the damage caused by natural disasters in the EU is currently insured, and in several countries this share is less than 5 per cent.” 

This burdens the growth and competitiveness of the twelve stars. Figures are not provided, but in order to understand the scale of the phenomenon, it is estimated that a disaster causing damage equal to 1 per cent of gross domestic product reduces GDP growth by around 0.2 percentage points in the quarter of impact. Unless you are insured. “If a high proportion of the damage were covered by insurance, the initial decline in GDP could be avoided.” 

The experts have no doubt: “In addition to adaptation efforts and mitigation measures for the transition to a low-carbon economy and thus limiting the extent of global warming, insurance also has a key role to play in mitigating the macroeconomic impact of future natural disasters” caused by climate change and “crazy” weather. 

Nevertheless, there is a significant caveat associated with climate change. It is unpredictable and, at the same time, considered to be on the rise. This increases the cost of insurance, and therefore, “it is possible that the insurance market for certain climate-related events will become unsustainable if the willingness or ability of households and businesses to pay for insurance is lower than the premium at which insurers are willing or able to accept the transfer of risk.” 

So what should be done? The answer to this question becomes the objective for policymakers and credit institutions. The ECB recommends exploring the possibility of public “incentives” for insurance. Another possibility is “the obligation to take out insurance in public-private partnerships,“ a tool that “can help mitigate both moral hazard and adverse selection issues.”