EU mulls cat bonds and public reinsurance to ward off climate dangers

Europe should leverage catastrophe bond markets and public-private reinsurance programs while pressing insurers to incentivize resilience in order to help close an insurance gap on climate-related natural disasters that has hit 75% in the EU, stretching to 95% in some jurisdictions, the EU insurance regulatory office  EIOPA and central bank ECB said in a joint policy paper.

“To support the overall supply of insurance, the use of catastrophe bonds could be increased to pass on part of the risk to capital market investors,” EIOPA said of the proposals.

“In the same vein, governments could set up public-private partnerships and backstops to partly cover the costs that insurers may incur in the event of major disasters,” authors wrote.

Such programs at the national level could be further backed by an EU-wide program that “makes sure sufficient funds are made available to European countries for reconstruction following rare, large-scale climate-related catastrophes.”

Calls for strong insurance frameworks follow the calculation that only about one-quarter of all climate-related catastrophe losses in the European Union are insured. In some countries, the figure is below 5%. Some underestimate costs, others assume they can fall back on government relief.

Those negligent consumer habits could dovetail with the rising cost of nat cat events to further increase the coverage gap, even more creating risks to financial stability, EIOPA and the ECB fear. Households and businesses recovery less quickly, if at all; lasting supply chain disruptions destroy value and public finances suffer strain, policy makers have argued.

“We need to increase the uptake of climate catastrophe insurance to limit the growing impact of natural disasters on the economy and the financial system,” said ECB Vice-President Luis de Guindos. “However, to reduce losses in the first place, we must ensure that a smooth and speedy green transition is complemented by effective measures to adapt to climate change.”

Beyond reinsurance backstops, policy makers may press for insurers to incentivize resilience. Insurers should “design their policies to encourage households and firms to reduce risk, for example by granting discounts for implementing effective mitigation or adaptation measures.” National governments could add to that effect.

EIOPA is slated to discuss policy options and initial feedback on May 22.

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