Global ratings agency Fitch Ratings believes that insurance markets across the European Union (EU) could benefit if recent proposals to establish a bloc-wide public-private reinsurance scheme for climate-related losses moves forward.
For background, the proposals were published in a joint paper by the ECB and the European Insurance and Occupational Pensions Authority in December 2024, aimed at enhance insurers’ financial resilience by pooling risks across the EU for greater diversification and stability.
Ultimately, Fitch feels that as climate change intensifies, state-backed reinsurance schemes could help insurance and reinsurance companies to continue providing cover in high-risk locations that they might otherwise have little appetite for.
The proposal’s strategy mirrors the success of other state-backed models, like Spain’s Consorcio de Compensacion de Seguros (CCS), that helps to stabilise the Spanish insurance market against climate risks by covering extensive losses from natural disasters.
As noted by Fitch, the EU scheme aims to be complementary to the national approaches instead of a replacement, preserving the integrity of existing schemes.
Fitch believes that the proposals may be “a significant step towards addressing the widening insurance protection gap for natural catastrophes due to the increasing frequency and severity of climate-related events. Only about a quarter of economic losses from natural catastrophes (nat cat) in the EU over 1981-2023 were insured and this figure has been declining.”
The ratings agency goes on to explain that a significant challenge highlighted by the proposals is the issue of insurability and affordability in high-risk areas.
“Until robust state-backed reinsurance mechanisms are in place, insurers are likely to reduce coverage in these regions,” says the ratings agency.
In fact, a Fitch poll at its recent Insurance Insights event in London, found that 69% of participants feel reducing cover in high-risk areas would be the most imminent consequence of climate change on the sector in 2025.
The floods in Spain in November 2024 exemplified the benefits of state-backed schemes in mitigating financial impacts on insurers, with the CCS helping to stabilise the marketplace.
The proposed EU scheme aims to improve the affordability and availability of insurance coverage for nat cats, provide a financial safety net for insurers, aid economic recovery after an event, and reduce fiscal burdens on governments from uninsured losses.
The proposal suggests strengthening EU public disaster risk management by establishing a fund, financed by member states, to support the reconstruction of public infrastructure following natural disasters. Meanwhile, the payouts would be contingent on member states having implemented agreed risk mitigation measures.
“This dual approach of reinsurance and public financing is designed to reduce macroeconomic and financial stability risks associated with uninsured losses by clarifying the division of responsibilities between the private and public sectors. It also seeks to incentivise risk mitigation and adaptation at both the national and EU levels,” says Fitch.
The post Public-private reinsurance scheme could benefit EU markets as climate change intensifies: Fitch appeared first on ReinsuranceNe.ws.