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 PESETA 4 damages from coastal flooding are projected to rise sharply with global warming for all EU countries with a coastline if current levels of coastal protection are not raised. Annual damages grow to EUR 239 billion (0.52% of the GDP for EU+UK projected in 2100) and EUR 111 billion (0.24% GDP) in 2100 under a high emissions scenario and a moderate mitigation scenario respectively.

In EEA’s member countries (and including the UK), disasters caused by weather and climate-related extremes accounted for some 83 % of the monetary losses over the period 1980-2017. Overall, around 35 % of the total losses were insured, although the proportion of the insured losses ranged from 1 % in Romania and Lithuania to 70 % in the UK.

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 2009/138/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 2020, the European Commission plans to review the Solvency II Directive and has asked European Insurance and Occupational Pensions Authority (EIOPA) for technical advice, including on the review of the Solvency Capital Requirement Standard Formula. EIOPA’s A CAT expert network provides them with the necessary knowledge on hazards and climate change.

In May 2018, the Commission adopted a package of measures implementing several key actions announced in its action plan on sustainable finance also addressing the issue of climate change. The package includes:

  • After the Council did so on 15/04, the European Parliament adopted on 18/06/2020 criteria for sustainable investments. This regulation establishes the conditions and the framework to gradually create a unified classification system ('taxonomy') on what can be considered an environmentally sustainable economic activity. This is a first and essential step in the efforts to channel investments into sustainable activities.
  • A regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU)2016/2341. This regulation introduces disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors into their risk management processes. Delegated acts will further specify requirements on integrating ESG factors into investment decisions, which is part of institutional investors' and asset managers' duties towards investors and beneficiaries.
  • A regulation as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks. The amendment creates a new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, which provides investors with better information on the carbon footprint of their investments.

The European Commission set up a Technical expert group (2018-2020) on sustainable finance (TEG) to assist it in developing, in line with the Commission's legislative proposals of May 2018:

As a permanent expert group of the European Commission that has been established under Article 20 of the Sustainable finance taxonomy - Regulation (EU) 2020/852, the Platform will assist the Commission in developing its sustainable finance policies, notably the further development of the EU taxonomy.

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.

The Blue Print for a new, more ambitious EU strategy on climate change adaptation clearly states that climate change costs and risks should be incorporated into fiscal frameworks.

On January 2020 the European Commission's new work programme was published. Under the first priority - 'A European Green Deal', the Commission announced its intention to launch an overarching strategy on the subject in the third quarter of 2020. The strategy will aim at redirecting private capital flows to green investments.


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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