Extreme weather events in recent years have increased the urgency to mainstream climate change adaptation into the different EU policy fields. There are few specific EU activities to mainstream climate change adaptation into policies for financial and insurance sectors. However many European policies related to natural disasters (see Disaster risk reduction) are very relevant to the financial and insurance sector, as they may help to prevent significant losses and financial disasters. The European Commission has also committed itself to increasing financing of climate-related activities by ensuring that at least 20% of the European budget is climate-related expenditure.
Recent extreme weather events have further demonstrated the vulnerability of various European countries to natural disasters. Europe has experienced severe floods and winter storms in recent years with billions of Euros of losses (e.g. Storm Xynthia in south-western Europe in 2010 caused more than 50 casualties and €6 billion in damages, Southeast Europe flooding in May 2014 killed over 80 people and resulted in over €1 billion in damages in Serbia alone).
Climate change may increase the intensity and severity of certain weather extremes and contribute to an increasing loss burden of natural disasters in the future. The ENHANCE (Enhancing risk management partnerships for catastrophic natural disasters in Europe) project estimates that extreme and catastrophic floods in Europe, such as those seen in 2013, currently occur approximately once every 16 years, but this may increase to once every 10 years by 2050. The study also suggests that annual average economic losses caused by extreme floods could become almost five times higher than in 2013.
The insurance sector covers a considerable part of weather-related risk in Europe, for example through property insurance that provides cover against damage from storms and rainfall. Insurers can use several strategies to manage their exposure to costs of natural hazards:
- limit their risk (e.g. by reducing coverage or reducing vulnerability of property),
- adjust premiums to reflect changed risk, and control the damage (e.g. by encouraging emergency measures), and
- transfer the risk, for example by the purchase of reinsurance or Alternative Risk Transfer (ART) products, including hedging risk on capital markets (e.g. through catastrophe bonds and weather derivatives).
In April 2013 the European Commission adopted a Green Paper on insurance in the context of natural and man-made disasters. Its objective is to raise awareness and to assess whether or not action at EU level could be appropriate or warranted to improve the market for disaster insurance in the European Union.
European policies that potentially contribute to reducing the sector's financial vulnerability are related to the creation of a single insurance market (for this purpose the EU launched an action plan for a single financial market, the Financial Services Action Plan), and the Solvency II Directive for insurance companies (adopted in December 2009; Directive 1009/138/EC). The latter directive requires firms to hold sufficient capital to reduce the risk of insolvency, including the risks from natural events. The goals of this directive are to reduce the risk that an insurer is unable to meet the claims of policyholders and also to reduce the potential losses of policyholders when an insurer is unable to reimburse all claims in full.
The insurance industry, in collaboration with governments, could promote long-term insurance policies that limit the negative consequences of climate change.
Improving the knowledge base
There is a need to understand the current risks and how risks are influenced by factors such as changes in hazard characteristics as a result of climate change, and changes in vulnerability and exposure due to socio-economic change. With its dedicated funding in the Horizon 2020 financial instrument the European commission is supporting specific research on the improvement of the climate risk assessment. Examples of important projects are ENHANCE and PREEMPT.
Supporting investment and funding
Although there is no specific EU policy dedicated to promote adaptation to climate change in the financial sector there is a collaboration with companies to better consider adaptation to climate change in investment decisions. One of the examples is the collaboration with the Carbon Disclosure Project which promotes among others climate reporting standards.
Furthermore, The European Investment Bank and the European Bank for Reconstruction and Development have set up funding where climate-resilient is mainstreamed into projects to improve adaptation to climate change impacts. The practical application of these standards serves as an example for other public or private financial institutions.
EU funding for adaptation is supported by the Multiannual Financial Framework 2014-2020, which ensures that climate adaptation actions have been integrated into all the major EU spending programmes. Further information can be found here.
- EM-DAT, The International Disaster Database - Year of launch
- NatCatSERVICE Database - YEAR of LAUNCH
- Methodologies for Climate Proofing Investments and Measures Under Cohesion and Regional Policy and the Common Agricultural Policy - Sectoral Fiches for Cohesion Policy and Adaptation Policy
- Enhancing risk management partnerships for catastrophic natural hazards in Europe
- Technical guidance on integrating climate change adaptation in programmes and investments of Cohesion Policy
- Solvency II Directive (2009/138/EC)
- Assessing the costs and benefits of adaptation options. An overview of approaches
- Economic approaches for assessing climate change adaptation options under uncertainty
- GREEN PAPER on the insurance of natural and man-made disasters
- Incorporating climate change considerations into agricultural investment programmes. A guidance document