The European Central Bank (ECB) warns that diminishing coverage of insurance against natural disasters could pose an economic burden for households, businesses and governments, and could spill over into the banking sector, it was announced today.
In an article for the forthcoming Economic Bulletin, ECB economists warn that coverage of natural-disaster insurance has recently declined and could fall even further.
Less than a quarter of losses caused by natural disasters in the European Union (EU) are covered by insurance.
In several countries, this coverage is, in fact, below 5%, according to data from an analysis by the European Insurance and Occupational Pensions Authority (EIOPA) and the ECB.
EIOPA and the ECB propose creating a public-private reinsurance scheme in the EU to share risks and expand coverage in member countries.
They also suggest establishing a European public catastrophe fund with the aim of improving disaster risk management and coordination.
The president of the ECB, Christine Lagarde, said last week that “Europe needs better protection against the financial repercussions of climate change and a more flexible energy system that makes the most of clean energy.”
Lagarde said in an ECB blog that Europe should broaden the coverage of climate insurance.
A recent proposal by the European Commission (EC) offers the opportunity to boost the ECB and EIOPA’s proposal to widen climate-insurance coverage through a EU-scale public-private reinsurance mechanism, according to Lagarde.
Furthermore, the ECB notes in the Economic Bulletin that “reducing the EU’s reliance on fossil fuels could help curb” one of the drivers of high inflation and current economic and financial uncertainty.
Energy markets are increasingly exposed to geopolitical disruptions and depend heavily on fossil fuels, so “a more sustainable energy mix would favour price stability and support the disposable income of European households,” the ECB adds.
The ECB estimates that an additional green investment of approximately 3% of the EU’s gross domestic product (GDP) will be needed each year through 2030 to achieve the EU’s climate objectives.
Between 20% and 25% of the total green investment should be covered by the public sector, while the remainder should come from private capital, say the ECB economists.
Therefore, it is important that Europe has deeper European capital markets, adequate public policies, and an efficient allocation of capital.
The article also mentions the strong impact that droughts and floods have on growth.
For example, low water levels on the Rhine in July reduced real GDP growth in Germany by about 0.2 percentage points in the third quarter, though activity is expected to recover by the end of the year, according to the Kiel Institute.
Forest fires in Spain and France led many companies to suspend their operations.
