EIOPA has published its report on “impact underwriting“, i.e. the ability of insurers to contribute to climate change adaptation by means of underwriting practices, thereby incentivising policyholders to take climate-related adaptation measures. 

The report is the result of a pilot exercise conducted with volunteer insurers in 2022. The pilot was also motivated by the technical screening criteria for non-life insurance to be eligible as climate change adaptation under the EU Taxonomy Regulation (which requires risk-based incentives for policyholders who undertake risk prevention measures, such as reduced premiums or deductibles).

Adaptation measures in this context range from sandbags for flood damage prevention, to domestic “green roofs“, alarms, early warning systems for adverse weather conditions, heat or fire-resistant building materials and property risk assessments. EIOPA’s focus is on structural measures and services that can be implemented by the policyholder before the loss event, which reduce physical risk exposures to climate-related hazards through lowering the risk that loss occurs or lowering the severity of such loss. These are typically small-scale measures with limited costs.

It comes as no surprise that property damage insurance was judged to be the business line most strongly impacted by climate change, with other non-life lines (such as motor, marine, aviation and transport and legal expenses) only weakly impacted, if at all.

EIOPA highlights that climate-related risk prevention measures will become an important measure to ensure the long-term affordability and availability of property insurance coverage given the increasing impacts of climate change.

EIOPA has identified 3 key challenges:

1. Lack of policyholder awareness about climate change and adaptation measures
2. Difficulties in recognition of adaptation measures in standardised insurance contracts
3. Cost of adaptation measures versus the financial incentives for policyholders (in the form of premium discounts or reductions in deductibles)

In particular, generalising the risk-reducing effects of adaptation measures for standardised insurance contracts was highlighted as a difficult and complex task. Respondents in the pilot referred to material challenges when assessing the potential effect on the risk insured or the number of claims, due to the difficulty in disentangling the climate-related affect from other risk factors.

Only a minority of respondents provided explicit premium discounts to incentivise the take-up of adaptation measures by policyholders, and some raised doubts about whether reductions in premiums (or deductibles) should be considered effective to incentivise adaptation measures in standard retail contracts, given the cost of such measures could exceed the potential policyholder benefits. Commercial insurance products, where policy terms are individually negotiated, may be better suited to reflect adaptation measures. 

Although EIOPA concludes in its reportthat the EU market is still at an early stage in relation to impact underwriting, some interesting examples can be seen in the US market, where several states require insurance discounts for buildings implementing certain features. For instance, Florida requires discounts of up to 87% on the windstorm portion of property insurance premiums where buildings implement wind- and storm-resistant features.

Impact underwriting: EIOPA reports on insurers’ use of climate-related adaptation measures in non-life underwriting practices