Higher insurance coverage reduces macroeconomic impact of climate catastrophes
An ECB Working Paper finds that higher insurance coverage is associated with less severe macroeconomic consequences of climate-related catastrophes. The study highlights the importance of policies to reduce the climate insurance protection gap.
Insurance buffers economic shocks from disasters
The paper develops a theoretical growth model incorporating natural catastrophes, climate change, and insurance, illustrating how insurance can mitigate disaster impacts.
Empirical analysis of thousands of disaster events across 47 developed and middle-income countries from 1996-2019 confirms that higher insurance coverage significantly reduces the macroeconomic consequences of catastrophes.
For instance, a disaster causing 1 percent of GDP worth of damage is estimated to reduce GDP growth by around 0.2 percentage points in the quarter of impact.
However, this initial fall in GDP may be averted if a high share of damages are covered by insurance.
The study also finds evidence that these GDP differentials linked to insurance coverage persist over time.
The growing climate insurance protection gap
Despite the proven benefits, a substantial climate insurance protection gap exists, with less than a quarter of natural catastrophe losses in the EU currently insured.
This coverage has recently been declining and may fall further as global warming intensifies, leading insurers and reinsurers to reduce coverage or increase premiums due to rising catastrophe risks.
The paper highlights that economic models failing to account for this mechanism may underestimate the full magnitude of the costs of climate change.
Insurance payouts are crucial for households and businesses to better endure post-catastrophe disruption and underpin the reconstruction phase, which can otherwise be prolonged and incomplete.
Urgent call for policy action
This paper delivers a timely and critical warning regarding the financial implications of climate change.
The identified protection gap, coupled with declining coverage, represents a significant vulnerability for economies worldwide.
Policymakers must urgently develop strategies to enhance private insurance penetration and foster public-private resilience solutions to avert escalating macroeconomic costs.