Climate Related Catastrophe Losses – Challenges for Society and the Insurance Industry

IRISH Broker cannot be the only party that considers it to be late in the day for there still to be so many unanswered questions when it comes to climate change and non-life insurance. This month, EIOPA and the ECB have published a joint discussion paper to elicit feedback on possible policy actions to address the widening uninsured gap for climate-related catastrophe losses.

This follows publication earlier this year of a report on insurers’ inclusion of adaptation measures to climate change in non-life underwriting practice, which found that adaptation was at an early stage, particularly when it came to standardising climate related adaptation measures in insurance contracts. The figures are stark.

We are told that currently, only one quarter of climate-related catastrophe losses in the EU are insured and that in some countries the figure is as low as 5%; that the uninsured gap is expected to widen as climate change impact increases and that its nature is such that it poses, “a risk to economic and financial stability”.

This discussion paper describes an absence of insurance cover that will have a potentially catastrophic impact on businesses and households Europewide if not addressed. The data on Ireland suggest that between 5 and 20% of extreme weather and climate related natural catastrophe risks here are insured, below the EU average and therefore, yes, this issue does concern us.

Those in the insurance industry know the extent to which insurance cover and expertise is expected to step in during the reconstruction phase that will follow a natural disaster, particularly in the developed world and the industry must be commended for its contribution to disaster recovery.

But this cannot happen if the insurance cover is not there in the first place! Suggested policy options would aim to boost uptake and efficiency of climate catastrophe insurance, whilst creating incentives to adapt to and reduce climate risks, without which we are told that natural disasters will impact the economy and our financial system, as well as insurer solvency due to increased frequency and severity.

What is urgently needed EU-wide, is imaginative leadership and drive that will conceptualise and follow through with solutions: for example, PPPs, where risk is shared (government/reinsurers/ insurers) and policyholders are incentivised to adopt risk management measures (thereby avoiding moral hazard!).

Or, national government risk management instruments that might include disaster reserves, catastrophe funds and cat bonds. And fundamentally, we need to sound a claxon to increase public awareness of a growing concern, to increase uptake of climate catastrophe insurance EU wide, to press the need for risk mitigation and to move forward, with urgency, with the green transition. One final point that is worth our industry globally thinking about: the industry may talk about net zero and the drive to limit global warming on the one hand, but on the other hand the fact remains that currently, fossil fuel projects are still insurable.

Do insurance companies globally need to take the position that when insuring these risks, that the cost will be calibrated in a way that such projects will become uninsurable, bearing in mind that ultimately, they are a significant contributor to the uninsurable problem of climate change?

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