Disaster insurance

As part of its overall strategy to adapt to climate change and in view of the growing frequency of natural and man-made disasters, the EU has launched a debate to assess the insurance market's degree of preparedness for events of this kind.

ACT

Green Paper on the insurance of natural and man-made disasters [COM(2013) 213 final of 16.4.2013 - not published in the Official Journal].

SUMMARY

Between 1980 and 2011, Europe suffered up to €445 billion in financial losses due to various disasters, such as river and flash floods, storm surges, forest fires and earthquakes, proving that the European Union (EU) is vulnerable to almost all types of natural disaster.

Given that such disasters may occur more frequently in the future, in 2013, the European Commission issued a Green Paper with a view to starting a debate on the subject. This document reviews the current system of disaster insurance, and asks whether it is sufficiently resourced, whether it needs to be improved and whether the EU should take action in this regard.

Insurance: A risk management tool.

The Green Paper seeks to increase the knowledge of those working in the insurance sector as to the merits of disaster insurance. It highlights how a culture of precaution and knowledge about risk management needs to develop.

Research currently shows that there is a very small market for disaster insurance in EU countries and that people and businesses often underestimate the real cost of insurance.

This matter is of particular concern for the EU as disasters can have major cross-border effects potentially threatening areas of neighbouring countries.

Even where costs of major disasters are concentrated in one area or one country, if they are inadequately covered by insurance, then the state affected carries large costs and burdens.

Establishing a market for disaster insurance

The paper sets out a number of methods that could be used in setting up a disaster insurance market. These include the following.

• A bundling together of several types of unrelated scenarios into a single insurance policy, e.g., fire and storm or fire and flood. Therefore, as each risk is independent of the other in the policy bundling, it would reduce the accumulated risks on any one hazard in the policy.
• The introduction of compulsory disaster insurance which would overcome problems of people not adequately insuring their assets because they underestimate the risk involved. There is also the issue of people who believe themselves at risk paying huge premiums as there is not a sufficiently large pool of customers, hence the high price.
• To help reduce the pressure on Member States’ governments, the EU also suggests that governments consider becoming involved as insurers or initiating state-run insurance pools. The setting up of disaster insurance pools, which would allow the insurance market to extend its capacity to absorb more risk.

Lastly, the Green Paper also points out how insurers could provide incentives to promote risk awareness and prevention so as to encourage people to insure their assets and reduce their vulnerability. These include discounts to people who take the initiative in insuring their assets against certain events, which, in turn, could lead to increased uptake of such policies.

Last updated: 10.04.2014