By Gautam Naik
Starting
Jan. 1, every company in Italy must buy insurance to protect its assets
from floods, landslides and other natural hazards that have become more
common thanks to global warming. It’s the latest sign of Europe’s
rising anxiety about climate change.
As
the fastest-warming continent, its climate losses have increased by
2.9% a year from 2009 to 2023, according to the European Environment
Agency. This year alone saw epic wildfires in Greece, a crippling
drought in Sicily and costly floods in the UK, central Europe and Spain.
And there’s still a month left.
The
biggest danger in Italy is flooding. Companies affected by such events
face a 7% higher probability of going bust, and those that survive
typically suffer a 5% average decline in revenue within three years,
according to a 2024 study published by the country’s central bank.
Most
Italian businesses — especially small and mid-sized ones — have no
protection at all. The new law will require companies to buy
coverage and insurers to write policies or face fines. The plan is
backed by a €5 billion ($5.3 billion) reinsurance fund, set up by a
state-controlled financial institution.
But
there are rumblings the plan’s rollout may be delayed. One concern is
that one big catastrophe could overwhelm the new fund. Another is that
insurers will abandon the country’s riskiest areas, as is happening in
the US.
Insurers in Italy have to accept all clients under the law, and that means there’s no limit to their loss exposure, said Petra Hielkema,
chair of the European Insurance and Occupational Pensions Authority
(EIOPA). As a result, the industry is “wondering: How much am I up
for and how do I price this?”
Across Europe, the financial risk is captured in one number: 75%.
That’s
the insurance-protection gap—the difference between insured and
uninsured losses from climate-related catastrophes, according to EIOPA
data compiled from 1980 through 2021. The gap in Italy for all natural
catastrophes is roughly 80%, based on Swiss Re research
for the past decade. In the US, where insurers have fled states like
California and Florida, the gap is a less onerous 42%.
European insurers are feeling the pinch. For the first nine months of 2024, Italy’s Assicurazioni Generali SpA
reported a “significant” €930 million hit from “adverse weather
conditions” across the continent. Deadly floods in central and eastern
Europe have generated some of the worst regional losses for insurers
this year.
“It’s a
critical concern for insurers and policymakers, and if no
countermeasures are taken, the insurance-protection gap is expected to
widen,” Hielkema said in an interview. Generali has said that new law
“will serve to fill the protection gap not only for companies, but also
for citizens.”
Read More: European Floods Threaten Insurers With Worst Losses in Decades
Unless
weather patterns change, higher premiums will make insurance less
affordable just when it’s needed most. A bigger gap threatens to
increase “financial stability risks and reduce credit provisions” in
countries with large exposures to catastrophe-risk events, according to a
report by the European Central Bank and EIOPA.
The two organizations are calling on insurers to expand programs such as “impact underwriting.”
It means providing discounted premiums for people and companies that
have taken steps to reduce risk, like flood-proofing a home or using a
real-time weather warning system for crops.
“You can’t prevent the damage, but you can lower it,” Hielkema said.
The ECB and EIOPA also want a wider adoption of catastrophe bonds,
instruments that allow insurers to pass on natural disaster risk to
hedge funds and other private investors. While the US market for such
bonds has grown strongly in the past two years, Europe is lagging
behind.
“European
perils still represent a relatively small portion of bonds currently
outstanding,” the ECB and EIOPA wrote in their report. “Part of the
reason for this lies in the high-transaction costs involved in executing
a cat-bond transaction.”
Disaster insurance varies across the continent. In Spain, a state-managed group
acts as a catastrophe insurer. In France, a state-backed program
provides affordable coverage to all citizens. The UK has teamed up with
private insurers to offer policies for flood risk. In Switzerland, most buildings are covered under a mandatory system.
Germany
doesn’t offer state support. Even after ruinous floods caused about €11
billion of insured damage in 2021, “there’s still no prospect of such a
scheme” in that country, Fitch Ratings said in a recent report. “This
leaves German insurers more vulnerable.”
Annual
climate losses in Europe soared to €50 billion in the 2021-2023 period
from less than €16 billion during the 2010-2019 period, Hielkema said.
And the European Environment Agency recently pointed out that, while extreme weather events are intensifying, the pace of adaptation is trailing.
The agency said while there is uncertainty, it’s unlikely the European Union will mitigate climate impact enough to reduce associated economic losses by 2030.