Europe's Insurers Face Climate Risk Capital Overhaul

European insurers are bracing for potential new capital requirements. These changes reflect the increasing threat of climate-driven disasters. The European Insurance and Occupational Pensions Authority (EIOPA) has recommended updates. These updates concern how the insurance industry accounts for natural catastrophe risks. Consequently, standard formula calibrations are being examined.

This recommendation follows a two-year comprehensive reassessment. EIOPA thoroughly examined the rising risks. Floods, windstorms, and other weather-related perils were scrutinized. Furthermore, the goal is clear. It is to ensure continued policyholder protection. Also, the overall stability of the EU’s insurance market is paramo

Natural disasters inflicted significant damage last year. In Europe, assets worth $31 billion were destroyed. Of this amount, $14 billion was insured. Munich Re provided this recent estimate. Devastating floods impacted Spain, Germany, and Central Europe.

EIOPA’s reassessment introduces new risk factors. These factors apply to 24 different regions. Flood risk factors were adjusted for three countries. Additionally, seven more countries were proposed for flood risk inclusion. These additions were made after material exposures were discovered. Moreover, windstorm risk factors may be increased for Iceland and other regions. Hail risk could also rise for Germany, Belgium, and Luxembourg.

Other hazards are also being considered. Wildfire, coastal flooding, and droughts are on EIOPA’s radar. These hazards may be included in formula calculations. As certain perils' frequency and intensity change, they may become more relevant. This increased relevance is due to climate change.

EIOPA is mandated to reassess these parameters every five years. The latest proposal has been submitted. It now rests with the European Commission. This is the European Union’s executive arm.

European authorities are increasingly concerned. The concern lies with the lack of insurance coverage for natural disasters. The European Central Bank and EIOPA have proposed a two-pronged approach. This approach aims to increase coverage. It includes a voluntary public-private reinsurance partnership. Also, a mandatory EU fund is proposed. This fund would cover reconstruction costs after catastrophes.

Europe is the fastest-warming continent. Consequently, it has suffered rising extreme-weather losses. This has been observed over the past 15 years. Between 1981 and 2023, natural catastrophes caused significant economic damage. Within the EU, direct economic losses reached approximately €900 billion ($936 billion). Alarmingly, one-fifth of these losses occurred in just the past three years.

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With information from Bloomberg