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The European Central Bank has highlighted how low insurance penetration is forcing governments to act as the insurer of last resort for climate disasters. A Bruegel policy brief noted that this dynamic increases fiscal volatility and lowers revenues in affected regions while turning public budgets into the primary absorber of losses. Public spending on the Valencia floods totalled 7.6 billion euros, covering between 42 and 63 percent of damages according to the assessment that also recorded 4.8 billion euros paid by Spain’s catastrophe insurance scheme.
Munich Re figures for 2024 show extreme weather events accounted for 93 percent of overall losses and 97 percent of insured losses, with Europe experiencing accelerated impacts as the fastest-warming continent per European Environment Agency data. Insurers have begun raising premiums or limiting coverage in vulnerable areas, a trend reported by Green Central Banking that exacerbates the protection gap and creates economic shockwaves. This leaves households and businesses exposed, potentially slowing recovery following disasters that have grown more frequent and intense.
In a 2023 joint discussion paper, the ECB and EIOPA advocated a ladder approach to natural catastrophe insurance to address the gap that currently leaves some member states with less than 5 percent of losses insured. Their 2024 follow-up proposed an EU-level public-private reinsurance scheme that would pool risks across countries and perils to exploit economies of scale. The scheme would be funded by risk-based premiums from insurers or national schemes, according to the ECB paper.
Complementing that mechanism, an EU fund for public disaster financing would rebuild infrastructure after events but only if member states had implemented agreed risk mitigation measures beforehand. The ECB stated that the complementarity of the two pillars would ensure efficient use of private and public funds while encouraging prevention and reducing moral hazard. These options should remain complementary to ambitious mitigation policies aimed at tackling climate change and reducing associated risks.
The climate insurance protection gap carries significant macroeconomic implications, the ECB warned, as events affect financial stability and weaken government finances through increased relief obligations. In the EU overall, only about a quarter of climate-related catastrophe losses are currently insured and this share is projected to shrink further as risks rise. The gap has already strained systems such as Spain’s Consorcio de Compensacion de Seguros, which saw around one-third of its reserves depleted by the Valencia floods.
Bruegel analysts have stressed the need for prevention and adaptation finance to narrow the protection gap so that public budgets face less exposure over time. Recent floods and storms across the continent have demonstrated how uninsured losses transfer directly to taxpayers and slow broader economic activity. The proposed EU measures seek to balance national solutions with bloc-wide risk sharing that maintains incentives for risk reduction.
