Stockholm (NordSIP) – As climate change triggers more intense and frequent extreme weather events such as heatwaves, storms, floods, and droughts, homeowners are becoming exposed to higher and more regular climate-related damages.
EU agencies have increasingly taken up the task of internalising these costs and helping consumers and investors prepare for this changing environment. The end of October saw two such announcements, one to do with exposures to natural disasters, which can affect home insurance premia, and another about climate stress testing, in a broader scope.
A New Natural Catastrophes Tool
In this context of climate, the European Insurance and Occupational Pensions Authority’s (EIOPA) responsibility to increase citizens’ awareness about natural hazards and climate risks becomes increasingly relevant. As a result, EIOPA is proposing the development of an awareness tool that can be used by all Europeans. The tool should help users understand the potential impacts of climate change on their properties, the benefits of adequate insurance coverage and what prevention measures they can take to reduce potential losses. The EU agency is now seeking feedback on its consultation paper on the development of such an awareness tool.
According to EIOPA, the tool would provide three main key pieces of information: (i) a risk score to natural hazards of a property based on its location; (ii) risk prevention measures available for the most common types of perils, and (iii) measures related to insurance coverage, providing information on the importance of being aware of exclusions, on potential national insurance schemes in place for natural catastrophes, among others. The tool focuses on five main types of catastrophes: earthquakes, river floods, windstorms, wildfires, and coastal floods.
EIOPA invites stakeholders to provide their feedback on the Consultation Paper by responding to the questions via the online survey no later than 28 February 2025. All responses will be published on EIOPA’s website unless otherwise requested.
Climate Stress Testing Shows Robustness to Transition
This initiative by EIOPIA comes on the heels of the publication of the publication of the results of the one-off “Fit-For-55” climate scenario analysis, conducted by the European Supervisory Authorities (EBA, EIOPA, and ESMA – the ESAs) together with the European Central Bank (ECB).
The assessment stress-tested the financial sector, both in aggregate and by decomposing it into four sectors: Banking Sector, Insurance Sector, IORP Sector and Investment Fund Sector. The stress test considered how the system would react under three transition scenarios:
- Under the baseline scenario, the Fit-for-55 package is implemented in an economic environment that reflects the ESCB’s June 2023 forecasts, while still facing additional costsrelated to the green transition.
- Under the first adverse scenario, transition risks materialise in the form of “Run-on-Brown” shocks, whereby investors shed assets of carbon-intensive firms. This hampers the green transition, since “brown” firms don’t have the financing they need to green their activities.
- Under the second adverse scenario, the “Run-on-Brown” shocks are amplified with other standard macro-financial stress factors.
According to the report, “the results of the exercise show that estimated losses stemming from a ‘Run-on-Brown’ scenario have a limited impact on the EU financial system. Over the 8-year horizon, total first-round losses stand between 5.2% and 6.7% of starting point exposures, in each sector. The second-round losses are mostly relevant for investment funds, and amount to 11.2% of starting point exposures.”
