Italy to Require Companies Buy Insurance for Climate Risks

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(Bloomberg) — Starting Jan. 1, every company in Italy must buy insurance to protect its assets from floods, landslides and other natural hazards that have become more common thanks to global warming. It’s the latest sign of Europe’s growing concern about climate change.

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As the continent with the fastest warming temperatures, its climate losses have increased by 2.9% annually from 2009 to 2023, according to the European Environment Agency. This year alone has seen epic wildfires in Greece, severe drought in Sicily, and costly floods in the UK, Central Europe and Spain. There is still a month left.

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The biggest danger in Italy is floods. Companies affected by such events face a 7% greater probability of bankruptcy, and those that survive typically suffer an average revenue decline of 5% within three years, according to a 2024 study by the country’s central bank.

Most Italian companies – especially small and medium-sized ones – have no protection at all. The new law will require companies to purchase coverage and insurers to write insurance policies or face fines. The plan is supported by a reinsurance fund worth 5 billion euros ($5.3 billion), set up by a state-controlled financial institution.

But there are rumblings that the plan’s launch may be delayed. One concern is that one major disaster could overwhelm the new fund. Another reason is that insurance companies will abandon the riskiest areas of the country, as is happening in the United States.

Petra Hilkema, president of the European Insurance and Occupational Pensions Authority (EIOPA), said that insurance companies in Italy must accept all clients by law, meaning there is no limit to their exposure to loss. As a result, the industry is “asking: How much will I get and how can I price it?”

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Across Europe, financial risk is captured in one number: 75%.

This is the insurance and protection gap – the difference between insured and uninsured losses caused by climate-related disasters, according to EIOPA data collected from 1980 to 2021. The gap in Italy for all natural disasters is around 80%, based on Swiss Re research For the past decade. In the United States, where insurers fled states such as California and Florida, the gap was less severe at 42%.

European insurers are feeling the pinch. In the first nine months of 2024, Italian company Assicurazioni Generali SpA reported a “significant” loss of €930 million due to “adverse weather conditions” across the continent. Deadly floods in Central and Eastern Europe have generated some of the worst regional losses for insurers this year.

“It is a serious concern for insurers and policy makers, and if no countermeasures are taken, the insurance protection gap is expected to widen,” Helkema said in an interview. Generali said the new law “will close the protection gap not only for companies, but also for citizens.”

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Unless weather patterns change, higher premiums will make insurance less expensive when it’s needed most. The larger gap threatens to increase “financial stability risks and reduce credit provisions” in countries with high exposure to disaster risk events, according to a report by the European Central Bank and EIOPA.

The two organizations are calling on insurance companies to expand programs such as “impact underwriting.” It means offering discounted premiums to people and businesses that have taken steps to reduce risk, such as protecting homes from flooding or using a real-time weather warning system for crops.

“You can’t prevent the damage, but you can reduce it,” Helkema said.

The ECB and EIOPA also want wider adoption of catastrophe bonds, instruments that allow insurers to transfer natural catastrophe risks to hedge funds and other private investors. Although the US market for such bonds has seen strong growth in the past two years, Europe is still lagging behind.

“European risks still represent a relatively small portion of bonds currently outstanding,” the ECB and EIOPA wrote in their report. “Part of the reason for this is the high transaction costs involved in executing a CAT bond deal.”

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Catastrophe insurance varies across the continent. In Spain, the state-run group operates as a catastrophe insurer. In France, a state-supported program provides affordable coverage to all citizens. The UK has teamed up with private insurance companies to offer flood risk insurance policies. In Switzerland, most buildings are subject to a mandatory regulation.

Germany does not provide state support. Even after devastating floods caused about 11 billion euros of insured damage in 2021, “there is still no prospect of such a scheme” in that country, Fitch Ratings said in a recent report. “This leaves German insurers more vulnerable.”

Helkema said that annual climate losses in Europe rose to 50 billion euros in the period 2021-2023 from less than 16 billion euros during the period 2010-2019. Recently, the European Environment Agency noted that although extreme weather events are intensifying, the pace of adaptation is lagging behind.

Despite the uncertainty, the EU is unlikely to mitigate climate impact enough to reduce associated economic losses by 2030, the agency said.

Sustainable finance in a nutshell

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A multilateral climate fund is preparing to access capital markets for the first time, with governments reluctant to provide the additional financing needed to cut global emissions. The Climate Investment Fund, a $12 billion fund within the World Bank, plans to issue bonds worth about $500 million, with the aim of stimulating investment in renewable energy and new technologies in developing economies over the next five to 10 years. Multilateral climate funds are designed to raise money from rich countries and distribute it to developing countries. But the national contributions needed to support this model fall far short of the massive amounts required to combat climate change.

• JPMorgan is turning its back on a Wall Street climate trend that many of its peers have embraced: it involves transitional financing.
• BlackRock, Vanguard and State Street have been sued by anti-ESG Republican-controlled states for allegedly violating antitrust law through their investments.
• Trafigura Group is poised for record growth in the trapped carbon credits market.

-With assistance from Alberto Brambilla.

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