Around three quarters of the economic losses caused by extreme natural events in Europe have historically been uninsured, creating a longstanding protection gap that is now evolving into an insurability crisis. As climate change increases the frequency and severity of weather events, insurers are reacting by raising premiums, restricting cover, or withdrawing from exposed areas. This shifts more risk onto households, businesses, lenders, and public budgets, creating wider vulnerability across the financial system and the real economy.

Insurers as stewards of the transition

Insurers are uniquely positioned as they are exposed to climate-related financial risks on both sides of their balance sheets. They have the capacity to act as stewards by directing investment away from unsustainable economic activities and incentivising transition efforts through engagement, stewardship, and underwriting conditions. However, the current regulatory framework does not yet fully capture climate risks, and insurers continue to invest in and underwrite activities such as fossil fuel extraction that contribute to the widening protection gap.

Physical risk: from the protection gap to the uninsurable spiral

The protection gap represents the difference between total economic losses from natural hazards and the share covered by insurance payouts. Between 1980 and 2024, approximately three-quarters of losses from extreme events in Europe were uninsured. Recent events demonstrate the scale of this issue: the July 2021 western Europe floods caused €46 billion in damage, with only €11 billion insured; the 2023 Emilia-Romagna floods resulted in an estimated US$10 billion in losses, with just over US$600 million insured; and 2024’s Storm Boris caused US$4.3 billion in losses, with only US$2.1 billion insured.

A logical individual response driving collective disaster

Insurers manage rising physical risks by repricing, increasing deductibles, or introducing specific climate-related exclusions. While logical for individual solvency, these actions create macroprudential risks. For instance, German property insurance premiums could double within a decade as climate-related claims increase. In the United States, homeowners in high climate-risk areas paid premiums 82% higher on average and faced non-renewal rates around 80% higher than low-risk areas between 2018 and 2022. This retreat can leave households unable to repay loans, directly impacting bank credit risk and public budgets.

The role of national solutions to address a systemic problem

National schemes help pool and spread exposure but face sustainability challenges as hazards rise. The French CCR scheme has operated at a loss ratio of over 100% for the last five years, meaning losses exceeded collected premiums. Similarly, the Spanish “Consorcio” scheme paid out more than €4 billion for the 2024 Valencia floods, losing around half of its reserves, even though total damage was estimated between €11.9 billion and €18.1 billion. These examples highlight that national solutions alone may struggle to absorb the financial impact of increasingly severe events.

Ensuring public-private schemes reduce risk

Public-private schemes must be more than risk-redistribution mechanisms; they must be designed to reduce risk. Mandatory participation for non-life insurers is essential to create large pools and avoid adverse selection. The report notes that the California FAIR Plan saw its exposure surge from US$50 billion in 2018 to US$458 billion in 2024 as private insurers withdrew. To prevent moral hazard, public backing should be tied to requirements for participants to take credible action on climate mitigation, adaptation, and prevention.

The risk reduction potential of the EIOPA and ESM proposal

An EU-level scheme could complement national solutions by adding a layer of diversification. Modelling shows that while pooling within countries reduces risk exposure by around 22%, pooling across European countries produces a further reduction of approximately 45% compared with standalone national solutions. A loan-based backstop would also reduce the cost of raising additional capital by approximately 17.9% compared to individual members raising capital through market channels.

The insurance macroprudential blind spot

Current regulatory frameworks like Solvency II focus on the resilience of individual insurers but overlook wider system stability. Systemic risk can arise from common exposures and transmission channels, such as insurers needing to sell assets to meet large claims, putting downward pressure on market prices. Existing models often fail to capture non-linear impacts and climate tipping points; a 2026 survey found that nearly all insurers considered models based on historical data to be less reliable as hazards intensify.

Identifying, managing and reducing systemic natural hazard risk

The report recommends five key policy actions. First, natural hazard insurance for primary residences and transport should be designated as a service of general economic interest (SGEI) under EU law to ensure mandatory, affordable cover. Second, harmonised requirements and mandatory participation should be introduced for national schemes. Third, an EU-level scheme and a dedicated natural hazard systemic risk capital buffer under Solvency II should be established. Fourth, a systemic climate risk premium contribution should be applied to insurers’ payments into schemes to reflect their support for high-emitting activities. Finally, the G7 High-Level Framework, IAIS Insurance Core Principles, and Solvency II framework should be upgraded to implement this proposed framework.

Conclusion

The historic protection gap is rapidly becoming an insurability crisis. Logical individual actions by insurers are creating vulnerability across the financial system and wider economy. Establishing a new natural hazard insurance framework that ensures affordable cover and incentivises risk mitigation is essential to manage climate-driven extreme weather risks before losses spiral out of control.