A report published by the European Environment Agency (EEA) stated that economic losses to the region could rise to as much as €190 billion per year by the end of the 21st century – highlighting the growing role reinsurers will likely play in mitigating climate change loss.
The report assesses the latest trends of climate change and its impacts across Europe and makes projections for its future implications, concluding that better and more flexible adaptation strategies, policies and measures will be crucial to lessen these impacts.
The total reported economic losses caused by climate-related extremes in the EEA member countries since 1980 amount to more than €400 billion, and according to the report, these growing economic losses throughout Europe are being driven by people and assets being increasingly exposed to climate extremes and possibly the deterioration of natural ecosystems.
While losses from natural hazards in Europe have varied substantially over time, the average cost of damage per year has nearly doubled from €7.6 billion per year in the 1980’s to €13.7 billion in the 2000’s, the EEA reported.
Recorded economic losses, based on average population over the entire period 1980–2013, comes to an average of €11.6 billion per year or €710 per capita.
Only around one-third of the total losses were insured, with Germany reporting the highest overall losses, followed by Italy and France.
This highlights the growing protection gap (difference between economic and insured losses post-event) across the world, even in more mature and developed markets, such as parts of the EU and the U.S.
And these costs are set to rise considerably, with studies indicating that even at modest levels of climate change, economic costs will potentially be high, and these costs will rise significantly in a scenario where there’s greater levels of warming.
The Mediterranean region is expected to be the most directly impacted with the highest future damage costs from climate change, but the whole of Europe will be heavily affected by impacts occurring outside of Europe through trade effects, infrastructure, geopolitical and security risks, and migration, according to the report.
The EEA said; “Estimates of the projected economic impacts of climate change in Europe are emerging, but the coverage of these estimates remains only partial and there is considerable uncertainty.
“The PESETA II study estimates that the annual total damages from climate change in the EU would amount to around EUR 190 billion (with a net welfare loss estimated to be equivalent to 1.8 % of current GDP) under a reference scenario (SRES A1B) by the end of the 21st century.”
Mediterranean countries could lose an average of 1.2% of GDP by 2050, with the largest economic losses relating to sea level rise and tourism, and across Europe coastal areas will increasingly feel the impact in water, floods, and agriculture management.
As a response to these growing risks, the insurance and reinsurance industry will be increasingly in demand as an important damage mitigation tool, but the report warns it could also come under strain from potential disruptions to global financial markets, “as previously demonstrated by hurricanes along the south-east coast of the United States,” naming hurricane Katrina as an example where “a substantial amount of the insurance costs fell on the London stock markets.”
Other risks to the industry are expected to come from financial flows being affected by repercussions to overseas investments and remittances.
“The projected increase in the occurrence and intensity of extreme weather events in many parts of the world will challenge insurance systems, and it may trigger increases in insurance premiums and decreases in coverage (Arent et al., 2014),” says the report.
However, European re/insurance companies will also see growing opportunities to invest in the developing world through schemes like micro-insurance, climate index-based insurance products, and multi-country insurance and reinsurance risk pools.
The EEA prescribes a combination of adaptation and mitigation strategies throughout Europe, which it says, should in turn be worked into other mainstream policies.
It suggests the EU adopts a combination of technological solutions, ecosystem-based approaches and ‘soft’ measures – in sectors of water management, agriculture, forestry, tourism, insurance, transport, energy, human health, infrastructure, disaster risk reduction, and coastal areas, and work to improve pan-European policy coherence.
“The development and use of climate and adaptation services are increasing in Europe. Improved knowledge would be useful in various areas, for example, on vulnerability and risk assessments at various scales and on monitoring, reporting and evaluation of adaptation actions, their costs and benefits, and synergies and trade-offs with other policies.
“By providing datasets, tools and best practices in a free and open way, ‘downstream services’ are expected to be developed in various thematic areas.”
Europe’s regions are already facing rising sea levels and more extreme weather, with more frequent and increasingly intense heatwaves, flooding, droughts, and storms due to climate change, and its ability to manage public-private sector collaboration, effectively use re/insurance, and implement other pan-European coping strategies could go a long way in determining the future stability of the region.
For reinsurers, these growing costs represent both greater opportunities and greater challenges as firms are tasked with keeping up with the shifting sands of the risk landscape as well as the impacts of these risks that could ripple across the global financial system.
