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Image credits: Didier Weemaels on Unsplash, 2015

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.

Recent extreme weather events have further demonstrated the vulnerability of various European countries to natural disasters. Europe has experienced severe fires, floods and winter storms in recent years with billions of Euros of losses. According to the Commission Staff working document on climate change adaptation, coastal and marine issues, without action, floods alone could cost Member States €100 billion per year by 2080, affecting around one million people. Coastal regions, under a high-emissions scenario, may suffer economic losses of around EUR €39 billion per year by 2050 and up to EUR €960 billion per year towards the end of the century.

Almost 90% of major natural disasters in Europe from 1980 to 2015 were linked to climate – but only one third of damages were covered by insurance.  

Policy Framework

While significant effort is placed at the national and European level on preventing damage caused by weather and climate related disasters, for example through adaptation strategies, climate proofing of investments, national risk assessments and other disaster and climate risk policies, not all risks can be averted. This residual risk affects all areas of society and can be addressed in different ways, through self-insurance, public aid, voluntary insurance schemes or mandatory insurance required by law.  Insurance policies raise awareness of climate risks and may also provide the right incentive to invest into preventive action.  The insurance industry, in collaboration with governments, could also promote long-term insurance policies that limit the negative consequences of climate change.

In April 2013 the European Commission adopted a Green Paper on insurance in the context of natural and man-made disasters. The aim of the paper was to raise awareness and to assess whether action at EU level could be appropriate to improve the market for disaster insurance in the EU.

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.

In March 2018, the European Commission’s action plan on financing sustainable growth announced EU legislation on a classification system for sustainable economic activities, on the labelling of green financial products, on investors’ and asset managers’ duties on sustainability and transparency on risks, and on insurer’s duties to take into account their clients’ sustainability preferences when advising them. Institutional risk management policies and banks’ capital requirements would also have to consider climate risks.

The evaluation of the EU Adaptation Strategy, published in November 2018, showed that actions on insurance and the financial sector may not have been sufficient to overcome hurdles for public-private cooperation so far. Although it has helped better understand how insurance markets function as a crucial adaptation tool in Member States, specifically on the role of insurance in climate risk management, EU action has yet to bring clear results. Here, EU added value lies in enabling cooperation between governments and insurers, raising awareness about the coverage gap and about the need for governments to integrate insurance in the management of all climate risks.


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

The LIFE project DERRIS works on the exchange of risk assessment know-how between public authorities, the private sector and insurance companies.

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