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Climate change is intensifying, bringing more frequent and severe weather events. While we must continue to reduce greenhouse gas emissions, we also need to adapt to the inevitable impacts of climate change. Insurance emerges as a vital safety net, offering protection against the residual risks that even the most robust adaptation strategies cannot fully eliminate. By effectively leveraging insurance, we can build a more resilient and sustainable future in the face of climate change.

How insurance supports climate resilience

Sharing the risk: Insurance distributes the financial impact of climate-related disasters across a wider pool. Instead of individuals or businesses facing capital-eroding or even devastating losses alone, the cost is shared more broadly, promoting greater economic stability and ensuring that communities can recover more quickly.

Incentivising action: Innovative insurance policies can encourage people and businesses to take steps themselves to reduce their exposure and vulnerability to risks. For example, insurance premium discounts for using drought-resistant crops can incentivise farmers to make their properties more resilient to such hazards. This proactive approach not only reduces future losses but also strengthens the overall resilience of our communities.

Facilitating recovery: Insurance payouts provide crucial financial support after disasters, enabling individuals and businesses to rebuild, get back on their feet, and resume their lives. By supporting swift recovery, insurance helps to minimise the long-term social and economic impacts of climate-related events. According to a PIISA survey, a vast majority of Europeans who have received compensation for economic losses suffered due to natural hazards obtained it through insurance (Lameh et al., 2024).

Policy challenges in insuring climate risks

Balancing government support and insurance: It is crucial to find the right balance between government support for disaster relief and market-based solutions such as insurance. Overly generous government aid can sometimes disincentivise the purchase of insurance, creating a situation where people become overly reliant on government assistance.

Regulatory limitations: Political instability and regulatory challenges, particularly competition laws, can hinder effective climate change adaptation. While competition laws aim to prevent anti-competitive behavior, they can obstruct beneficial collaborations between insurance companies, such as sharing information on climate risks. These collaborations might be crucial for proactive adaptation measures.

Improving public awareness: Many are not fully aware of the availability and benefits of climate-related insurance products, particularly innovative options like parametric (also called index-based) insurance. While parametric insurance is available in countries like France, it remains largely unknown and unavailable in some other European countries, such as Finland (DLA Piper, 2023). In a recent PIISA survey, more than half (58%) of 951 European respondents reported not being insured against any climate related risks (Lameh et al., 2024). In the same survey, it was noticed that the level of concern expressed by European citizens about climate change over specific natural phenomena is linked to the level of insurance coverage they have.

Policymakers: Key enablers of climate risk insurance

Policymakers have a significant role to play in creating an environment where insurance can effectively contribute to climate change adaptation:

Addressing market barriers: Government intervention may be necessary to address gaps in insurance cover that hinder the development and uptake of climate-related insurance. This could involve ensuring fair access and affordability of insurance e.g. through subsidisation. A PIISA review report published in 2024 delves deeply into the current state of insurance coverage in European countries, in addition to the many barriers causing a gap in insurance protection. Systems with public or public-private insurer involvement, mandatory insurance for asset owners, and dedicated disaster relief funds (rather than ad-hoc measures) have proven most effective in increasing insurance penetration rates (Ceolotto et al., 2024). Risk-based premiums with public support for lower-income groups, coupled with incentives for risk reduction investments, could integrate insurance into a broader risk management framework. However, these features must be tailored to each country's context.

Promoting innovation: Supporting research and development of innovative insurance products, such as parametric insurance, can significantly enhance social and economic resilience. Parametric insurance triggers payouts based on observable events, such as rainfall intensity or wind speed, rather than relying on detailed damage assessments. This can significantly speed up the claims process and provide much-needed liquidity to communities in the immediate aftermath of a disaster.

Overcoming policy barriers: Policymakers can promote insurance by overcoming legislative and policy barriers. Subsidies for insurance premiums could incentivise e.g. farmers to adopt insurance, particularly parametric insurance, which offers advantages over traditional indemnity insurance by mitigating moral hazard and simplifying claims processes. Premium subsidies are already extensively in use in the United States, but according to common agricultural policy (CAP) strategic plans , only 15% of EU farms receive support for insurance premiums, participation in mutual funds, and other risk management tools helping them cope with crises (European Commission, 2022). By supporting the development of the parametric insurance market, policymakers can help cities and sectors like agriculture and forestry to better manage climate-related risks.

A path forward

The PIISA project is at the forefront of developing innovative insurance solutions, aiming to test new approaches, foster collaboration, and accelerate the uptake of insurance. Please join the conversation: How can we overcome these challenges and promote resilience through insurance? What's your solution?

Authors

• Marika Huttunen, Tyrsky Consulting

References

Ceolotto, S., Colucci, M., Taddeo, S., Perrels, A., Huttunen, M. & Mysiak, J. (2024). Role and potential of insurance in accelerating climate adaptation in Europe.

DLA Piper. (2023). Global Parametric Insurance Law Guide.

European Commission. (2022). Common Agricultural Policy for 2023-2027: 28 CAP Strategic Plans at a Glance.

Lameh, G., Suarez Groen, H., Grassi. L. & Carrai, L. (2024). Focused market reviews in WP3 pilot sectors/areas.