Flood protection gap: evidence for public finances and insurance premiums

Climate-related physical risks pose serious concerns for both public and private finances, and is of utmost importance to contain economic losses when natural catastrophes occur. Against this background, the paper models the impact of currently uninsured flood events on the economy and estimates its overall costs for the EU27. First, the paper estimates the share of premiums associated with insured flood events over total premiums. Then, it investigates the extra premiums written needed to close the flood protection gap by requiring all EU countries to have at least a minimum level of insurance protection. The results show that insurance premiums written should at least be doubled to reach a harmonized level of penetration equal to 50%. Third, the paper proposes a stylised approach to quantify the potential economic losses associated with uninsured flood events at different levels of insurance penetration, when the insurance protection fails due to defaults in the insurance sector. The model can be used to assess the size of loss that might affect public finances if no preventive measures are taken to increase society's resilience against climate and weather-related risks and compare it with a safeguard mechanism under a 'worst case' scenario. The results show that losses affecting public finances might amount to EUR 27 billion today. Under an alternative scenario accounting for an increase in insured losses due to an uptake in the insurance sector, losses would decrease by up to 50%.