Deepen cat bond markets to tackle climate insurance protection gap: ECB’s Giuzio

Creating deeper catastrophe bond markets could help in tackling the climate insurance protection gap in Europe, according to the European Central Bank’s (ECB) Margherita Giuzio.

Margherita Giuzio is a Team Lead in the Market-Based Finance division of the Macroprudential Policy and Financial Stability Directorate at the European Central Bank (ECB).

As a result, she has played a role in the recent discussion paper published by the ECB and the European Insurance and Occupational Pensions Authority (EIOPA) that looks at how increased use of catastrophe bonds could support the overall supply of catastrophe insurance across the European Union (EU).

Speaking during a Podcast interview with Jason Mitchell, Head of Responsible Investment Research at asset manager MAN Group, Giuzio explained some of the thinking behind the ECB’s call for greater use of catastrophe bonds.

Cat bonds are seen as part of a ladder of solutions to the climate and disaster risk insurance gap, coming into play at the level where major catastrophes occur.

Giuzio said that, “The deepening of cat bond markets can help to tackle the climate insurance protection gap.”

Adding that this, “May be supported by further progress on the EU capital markets union.”

She continued to explain the role of catastrophe bonds, saying, “We start recognising that cat bonds can complement traditional reinsurance to provide liquidity for reconstruction after disaster and to lower the overall cost of coverage.

“They can, in fact, provide higher diversification, by transferring part of the tail-risk assumed by their insurers to capital markets, so to a wider set of investors.

“They can also stabilise the cost of insurance and, likely, traditional cat insurance policies. They are typically structured to provide cover over multiple years which may be particularly convenient for public-private partnerships.”

She went on to discuss parametric triggers in catastrophe bonds and the challenge of basis risk, so cat bonds not triggering when a major event might occurred but did not meet the event parameter thresholds necessary to trigger a payout, saying this can be “controversial”.

But Giuzio also noted that there are additional measures that could be taken in Europe to make catastrophe bond issuance more appealing and accessible.

“There are some measures that can foster a greater and more effective use of catastrophe bonds,” Giuzio explained. “For example, the reduction of issuance cost, the simplification of the issuance process and further progress on the capital markets union to promote the depth, the liquidity, but also the cross-border integration of EU capital markets.”

As we reported recently, part of the discussion paper highlights the potential for the EU to provide some kind of issuance grant for catastrophe bond sponsors, to make issuance more attractive in the region, something we have heard was well-received.

Giuzio also highlighted the need to embed resilience within any European regional measures on catastrophe and climate insurance, making access to risk financing conditional on specific resilience measures being taken by member states.