European Commission consults on natural and man-made disaster risk transfer

The European Commission has launched a new green paper consultation process on the topic of natural and man-made disaster insurance and risk transfer. Part of a two-pronged strategy on climate change and adaptation, the EC sees the need for a wide and public debate on the adequacy and availability of existing disaster insurance options. The paper looks at the insurance and reinsurance markets capacity and capabilities and calls for input from interested parties.

Internal Market and Services Commissioner, at the EC, Michel Barnier commented; “Natural and man-made catastrophes are on the rise, while the capacity of the insurance sector to insure against them is not fully utilised. European-level solutions to bridge the insurance gap need to be explored, along with common means of prevention and ways of raising awareness among citizens and companies. This Green Paper launches an important debate on the issues and will also allow us to get a more complete overview of the situation in different Member States.”

Kristalina Georgieva, European Commissioner for International Cooperation, Humanitarian Aid and Crisis Response, added; “Well-designed insurance policies can also work as a market-based instrument to discourage risky behaviour and promote risk awareness and mainstream disaster-proofing in economic and financial decisions.”

One of the strategies main objectives is to promote the use of insurance and risk transfer against natural and man-made disasters at a European Union level. Disasters in the EU cause losses in the billions of euros every year as well as a significant human toll, affecting economic stability and growth in the region. Because costs are often inadequately covered by insurance the toll falls on the member states to recover from disasters, creating imbalances in terms of finance.

The objective of the green paper on insurance of natural and man-made disasters is to create a discussion around the adequacy and availability of disaster insurance and raise awareness of this issue in the EU. It aims to use the output of the consultation to help assess whether action is required at the EU level to improve the market for disaster insurance in the EU.

This consultation process is a continuation of one which began in 2010 when the EU started to look seriously at disaster insurance pooling and other mechanisms such as catastrophe bonds, insurance-linked securities, weather derivatives and weather risk management techniques.

The incidence of natural disasters in Europe is on a steep rise according to data from the European Environment Agency, with flooding, meteorological and climatological events the main types of disaster that have increased most rapidly.

Natural disasters in EEA States (1980–2011)

Between 1980 and 2011, the economic toll of natural disasters in the whole of Europe approached €445 billion euro in 2011 values, according to the EC. About half of these losses can be attributed to a few large events, such as European windstorms like Lothar in 1999, Kyrill in 2007 and Xynthia in 2010, and major flooding events such as in central Europe in 2002 and in the United Kingdom in 2007.

As incidence and economic cost of natural disasters rises it makes the adequacy and availability of private market insurance and risk transfer ever more important, hence the need for the consultation. The green paper seeks responses to issues such as penetration and availability of disaster insurance, product bundling and risk pooling, making disaster insurance compulsory, Governments as risk bearers or reinsurers of last resort, parametric and index-based weather insurance, availability of meteorological data, the use of catastrophe bonds and insurance-linked securities, pricing and contractual issues such as length and terms. The green paper also seeks responses to questions on man-made and industrial disasters as well.

The EU is attempting here to start a conversation that aims to help make disaster insurance more readily available and for purpose and in order to meet that goal reinsurance and alternative risk transfer techniques will play a key role. In terms of financing the reinsurance and risk transfer tools to enable disaster insurance to become more readily available, the capital markets and third-party investors have a role to play and an opportunity to have their voices heard.

The green paper consultation is open until the 30th June. We would recommend any interested parties at least read the paper and respond to the consultation if you have ideas which could assist the EU wide insurance and transfer of disaster risks.

From the capital markets point of view, any EU wide solution could benefit from the backing of third-party capital and could create opportunities for investors looking for exposure to disaster risk. For insurers, reinsurers and brokers it is prudent to remain appraised and engaged in such consultation processes which could impact on your market or may require involvement or result in new business opportunities.

Download the green paper here (PDF format).

You can submit your response to the consultation here.