Climate-related insurance losses may have broader implications for the overall economy, the European Central Bank cautions.

The European Central Bank (ECB) has issued a stern warning about the increasing risk of climate change to insurance companies, citing it as a potential source of systemic risk. In its latest financial stability report, the ECB emphasized the importance of policy action aimed at reducing the climate insurance protection gap.

The insurance protection gap, a difference between the economic losses from natural disasters and the insured losses, could widen further due to rising insured losses, making coverage unaffordable and eroding insurance underwriting. Historically, most economic losses in the euro area have been uninsured.

In 2024, natural disasters resulted in €30bn in economic losses, with only €13bn being insured. This stark disparity highlights the need for greater insurance coverage to protect against the growing threats posed by climate change.

The ECB's review of spillover effects to other sectors of the financial system indicates that the impact of climate change will likely be higher. The widening insurance protection gap is identified as a systemic risk, as it could impact the value of assets and property, leading to repricing in areas more prone to extreme weather events from climate change.

The European Insurance and Occupational Pensions Authority (EIOPA) has recommended that insurers set aside more capital for fossil fuel investments, acknowledging the financial risks associated with these investments in the context of the transition to a green economy.

Fiona Hauke, a researcher at Urgewald, emphasizes the need for action beyond acknowledging the systemic risk of climate change. She suggests tools the ECB could use, such as introducing a green interest rate or integrating climate change in its monetary operations.

Marika Carlucci, a senior EU policy officer at ShareAction, has expressed disappointment that the report only focuses on physical risk and not the risks insurers face from the transition to a green economy. She underscores the critical role insurers have to play in building resilience and reducing climate-related risks.

The debate over the EU's sustainable finance framework is ongoing, with some calling for its rollback. Julia Symon, head of research and advocacy at Finance Watch, finds the greater emphasis on climate risks in the ECB's financial stability reports to be a "worrying trend" reflecting the increased losses from climate change.

As the debate unfolds, it is clear that climate change poses significant risks to the insurance sector and the broader financial system. The ECB's report serves as a timely reminder of the need for urgent action to address these risks and build a more resilient and sustainable financial future.

This article was last updated on June 9, 2025.