NAT CAT AND PROTECTION GAPS

RESILIENT HOME INSURANCE

Safeguarding home insurance

Reducing exposure and vulnerability to extreme weather

Globally, insured losses from extreme weather events have been on the rise. They accounted on average for roughly one third of total economic losses and have exceeded $100 billion every year since 2020. Between 2000 and 2023, annual accumulated insured losses for more localised perils such as floods, wildfires and severe convective storms accounted for 55% of total insured losses on average (Figure 1).

Over the past decade, Europe has seen a rise in severe weather events and related losses.¹ In response to these growing losses, the European Commission launched the 2022 ‘EU Climate Resilience Dialogue’ to explore ways to close the protection gap and boost Member State resilience to intensifying extreme weather.² Considering extreme weather threats are becoming more frequent and severe, in 2024 the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB) have developed a two-pillar EU-level proposal to address the widening extreme weather protection gap, with an EU public-private reinsurance scheme and an EU fund for public disaster financing.³

A recent report by the Geneva Association⁴ explores the growing challenges to the availability and affordability of home insurance, particularly in advanced economies, and offers a roadmap for reducing property risks and boosting local resilience.

Rising exposure and vulnerability

Socioeconomic factors are among the key factors driving exposure and vulnerability to extreme weather, exacerbating losses. For example:

• Land-zoning practices traditionally have been driven by socioeconomic priorities, resulting in a rising concentration of people and assets in hazard-prone zones, where development continues.
• Building codes, while updated around every three to five years, local adoption and enforcement are hindered by resource constraints and political pressure.
• Inadequate operational maintenance and capacities of utilities could exacerbate extreme weather impacts.
• Urbanisation can lead to concreting and destruction of natural ecosystems, heightening flood risks. Densification and rising wildland-urban interface are increasing wildfire risk.
• High rebuilding costs are driven by factors such as inflation, supply-chain disruptions, labour shortages and tariffs.

“It is more critical than ever for Europe and the rest of the world to double down on adaptation and invest in local and property-level resilience.”

Rising challenges with insurance availability and affordability

Access to insurance is essential for economic growth and resilience, supporting investments and enabling faster recovery for homeowners, businesses and governments after disasters. However, years of high insured losses and the growing gap between collected premiums and claims payouts could lead to eroding capital and challenges in maintaining the financial health of the industry.

Re/insurers have been promoting the need for risk-based insurance pricing to bring focus to regions and properties where investment in risk reduction and prevention measures are needed. Rising risks and the absence of risk mitigation measures have led to challenges with insurance availability and affordability (Figure 2).

Stakeholder actions impact the risk profile of properties and their localities

The risk profile of a property evolves throughout its lifecycle, shaped by the decisions of homeowners and a complex landscape of stakeholders involved in land zoning, permitting, development and construction, valuation and financing, and risk management. The Geneva Association’s report provides an in-depth analysis of how various stakeholders could be incentivised to invest in local resilience.

For example,

• Homeowners typically weigh quality of life and cost of living when deciding to build or buy, but rising insurance costs and hazard-disclosure laws are impacting their decisions. To invest in retrofits, homeowners need clear risk information, guidance, and financial incentives – such as subsidies, increased property value, and lower insurance or mortgage rates.
• Local governments are motivated by the need to expand affordable housing while overseeing zoning, permitting, enforcing building codes, urban design, and coordinating with other levels of government. Incentives to invest in local resilience could include protecting property tax revenue, minimising legal liability, improving credit ratings, and re-election.
• Government-backed insurance pools may stabilise markets in the short term, but they generally do not address the root causes of rising risks. Promoting and investing in local resilience could improve the financial health of the pools and help keep private insurers in the market.

Figure 3: Examples of stakeholders whose actions impact the exposure and vulnerability of properties

Source: Geneva Association

A two-tier approach with all hands on deck is proposed to shape local resilience

• Tier 1 involves identifying and scaling measures that have effectively strengthened local resilience
• Tier 2 involves structural reforms in property valuation and mortgage systems, government-backed insurance pools and credit rating to drive behavioural change.

Table 1: A two-tiered approach to scaling up resilience at the local and property levels

In conclusion, it is more critical than ever for Europe and the rest of the world to double down on adaptation and investing in local and property-level resilience to address short-term challenges, particularly for those most vulnerable, also resulting in long-term benefits by preventing rising exposure and vulnerability.