Viewpoint: Why Speedy Payouts Matter in EU Plan to Close Insurance Protection Gap

Executive summary: With plans for an EU natural disaster insurance fund in the works, EIP’s founder and CEO Ross Sinclair explores the need to improve the speed of the payout process as an essential part of building climate resilience.

As climate volatility across Europe continues to increase, so too does the ongoing financial fallout from these extreme weather events.

Storm Goretti, which tore through Europe at the beginning of this year, is the perfect example of costs continuing to rise even after the event has taken place. Catastrophe insurance data provider PERILS recently increased its initial loss estimate as a result of the storm from €467 million to €479 million ($548.5 million to $562.6 million).

With a lot of recent climate events, insurance protection gaps have appeared, further complicating the financial implications of weather volatility. (Protection gaps are the share of uninsured losses relative to total economic losses).

For example, following the 2024 Valencia floods, it was revealed less than €4.5 billion ($5.3 billion) of the €11 billion ($12.9 billion) losses were insured. A similar situation occurred in 2021 when floods hit Germany’s Ahr Valley, after which only €13 billion ($15.2 billion) of the total €51 billion ($59.8 billion) fallout was covered.

A recent report from the European Insurance and Occupational Pensions Authority (EIOPA) pointed to growing protection gaps for floods, earthquakes and wildfires, highlighting Greece and Italy as the nations with the highest total protection gaps for natural disasters.

Collective Protection

To help close these gaps in the wake of natural disasters, European insurers, pension funds and financial regulators are calling for an EU-wide risk-sharing mechanism – worth up to €65 billion ($76.3 billion).

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Regulators have argued that this public-private partnership would allow the bloc to make use of its strong credit rating to access cheaper funding, using this to support insurers when natural disasters strike.

Pooling risk at a European level is a logical step that would help spread exposure more efficiently across a wider geographic region. Moreover, a fund would help support capacity by enabling insurers and reinsurers to take on larger risks, and ease some of the pressure on pricing by limiting the impact of large, localized loss events.

Rethinking the Crisis Claims Process

However, pooling alone does not solve the real-world problem most policyholders face after an event, which is access to fast cash. In today’s volatile climate environment, speed and predictability matter just as much as the cover itself.

Historically, the model of traditional claims processes means that many consumers and businesses are often left waiting for prolonged periods for funds to cover losses, with some forced to engage in lengthy legal disputes just to get a payout. For small businesses, with operations that are been halted by weather volatility, they may never be able to open their doors to customers again.

Alongside supporting calls for a pooled fund, European insurers also should look to modernize their processes to allow for quick cash distribution in the face of inclement weather.

Parametrics Help Build Resilience

This is where parametric insurance models can play a complementary role. These policies pay out automatically when specific, measurable conditions, such as wind speed, flood levels or earthquake magnitude, reach an agreed threshold. Funds are then released on a pre-agreed basis, giving those affected access to money quickly, avoiding a cashflow death spiral.

Advances in technology, such as satellites, AI-driven weather modeling and IoT sensors, allow these triggers to be monitored continuously and objectively. Coverage can also be customized to account for seasonal weather variations and varying scale.

From the insurers’ perspective, not only do parametrics reduce the chance of customer litigation but the reliance on pre-agreed triggers verified by third-party data supports pricing modeling and reduces the operational costs of claims processing overall.

Offering parametric policies can also boost insurers’ sales, as customers often see them as a comprehensive and dependable solution that justifies the investment by providing peace of mind if the worst happens.

More complex indemnity cover can then sit alongside this to support longer-term recovery.

Building a System That Delivers

Ultimately, the proposed EU-wide fund represents a critical step towards closing Europe’s growing protection gap, but it cannot be viewed as a silver bullet.

While pooling risk at scale will strengthen the resilience of insurers and improve the bloc’s ability to absorb large shocks, it must be matched by innovation at the point of delivery.

Failure to do so and European consumers and businesses will continue to struggle under the weight of high repair costs and cashflow obstructions when disaster strikes – hindering their ability to get back on their feet.

Through a combined approach that pairs the financial firepower of a shared European backstop with modern, responsive payout mechanisms, Europe has the potential to build a truly climate-resilient insurance system.

Photograph: Cars piled up in the street following floods in the Sedaví area of Valencia on Oct. 30, 2024. Photo credit: David Ramos/Getty Images Europe