Italy to Require Companies Buy Insurance for Climate Risks

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.”

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.

Sustainable Finance in Brief

A multilateral climate fund is preparing to access capital markets for the first time, as governments balk at providing the extra financing needed to cut global emissions. The Climate Investment Funds, a $12 billion fund inside the World Bank, is planning a roughly $500 million bond issuance, with proceeds intended to spur investment in renewable energy and new technologies in developing economies over the next five to 10 years. Multilateral climate funds are designed to collect funds from rich nations and distribute them to developing countries. But the national contributions needed to back that model are falling well short of the vast amounts required to fight climate change.

Photograph: Activists demand that rich countries pay up for climate finance for developing countries of the Global South at the COP29 Climate Conference on November 22, 2024 in Baku, Azerbaijan. Photo credit: Sean Gallup/Getty Images Europe