Morningstar DBRS recently published a commentary that highlights the insurance protection gap on extreme weather and climate-related losses in Europe.
Severe weather events are expected to become more frequent and intense in the longer term across Europe, and analysts have noted that it is becoming more and more crucial to reduce the insurance gap which remains relatively large on average across the European Economic Area (EEA), as per data published by the European Insurance and Occupational Pensions Authority (EIOPA).
An alarming figure to highlight is that in 2021 and 2022, annual economic losses caused by extreme weather and climate-related events in Europe were at a record high of €59 billion and €52 billion, respectively.
Looking back at 2023, Europe experienced the highest number of days with severe extreme heat stress, the largest wildfire on record, and the highest river flows seen throughout the year.
Analysts have noted that the insurance sector could play an important role towards relieving the strain of climate and weather-related losses, as well as incentivising the implementation of adaptation measures to help households and organisation’s vulnerability to climate-related catastrophe risk.
As per the European Insurance and Occupational Pensions Authority (EIOPA), there is still a significant insurance protection gap when comparing economic losses to insured losses generated by weather-related catastrophic events.
According to the organisation’s dashboard on insurance protection gap for natural catastrophes, an average of around 27% of total economic losses generated by extreme weather-related events are insured in Europe.
Morningstar DBRS said: “Reducing the insurance gap might be challenging to achieve. While maintaining strong
underwriting profitability levels overall, in 2023, several large European insurance companies reported a rising impact of natural catastrophe losses compared with the year before. We consider that the intensification of catastrophic events’ frequency and severity will likely prompt insurance companies to increase their prices resulting in decreased affordability, which is not conductive to reducing the protection gap.”
Mario De Cicco, Vice President, Global Insurance Ratings at Morningstar DBRS, commented: “The intensification of catastrophic events’ frequency and severity could prompt to lower affordability and availability of insurance protection which is not conductive to reducing the insurance gap. One of the solutions involves efficient partnerships between the public and private sector, which may become more widespread across the European continent.”
Staying on the topic of partnerships, Morningstar DBRS noted how across some European countries, similar insurance schemes have already been implemented.
Analysts state that an EU-wide insurance scheme could be implemented in the future, however one thing that is preventing this from happening is that EU measures are currently focusing more on post-disaster relief and climate adaptation incentives.
A key example is how in Spain, the state-owned Consorcio de Compensación de Seguros (CCS) manages the
insurance scheme covering significant risks such as floods, earthquakes, and windstorms.
However, it is important to note, that the CCS does not receive public funding but meets its obligations through the premiums received via a mandatory surcharge which is paid by policyholders to their regular insurance policies and the constitution of an equalisation reserve.
Analysts explained that they consider Public-Private Partnerships (PPPs) to be an effective tool to reduce the protection gap and mitigate a potential insurability crisis due to the mandatory insurance coverage requirement they are built upon.
“On the other hand, they need to be structured in an efficient way in order to avoid adverse selection and support the right incentives to implement adaptation measures and risk management practices among policyholders. While we do not foresee any significant impact from climate-related risks on European insurance companies credit ratings in the short term, we will continue to monitor their exposure to natural catastrophes and the implementation of insurance schemes and PPPs as an important risk-mitigating mechanism thanks to their risk-pooling benefits,” they concluded.
