All Companies In Italy Must Now Purchase Climate Insurance – It’s The Law

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It will be a whole new business atmosphere in Italy starting on January 1, 2025. That’s because the federal government there will require every company to buy climate insurance as internal financial support to offset losses from floods, landslides, and other natural hazards.

The warnings about global warming in Italy have morphed from story to harsh reality, yet most Italian businesses — especially small and mid-sized ones — have no climate risk protection at all. The new law mandates that companies must buy coverage and insurers must write policies or face fines. The plan is backed by a €5 billion ($5.3 billion) reinsurance fund, set up by a state-controlled financial institution.

Italy faces severe threats from flooding. A 2024 study concludes that affected firms have a 7.3% higher probability of exiting the market. If they survive, in the three years after the calamity, firms experience an average decline in their revenues and employment of -4.9% and -2.2%, respectively. These impacts are greater for micro-small, younger, and low-tech firms.

In addition, researchers found that adverse natural events are associated with an increase in the share of intangible assets. This evidence suggests that natural disasters cause a greater loss of tangible assets compared to intangible ones, as the former are more exposed to the risk of physical deterioration than the latter.

Europe Braces For Controversy As It Attempts To Close The Climate Protection Gap

And it’s not just Italy that’s facing climate risk emergencies and the tenuous need for climate insurance protection.

Europe is the fastest-warming continent, and mandatory climate insurance is the latest European marker indicative of rising anxiety over climate change and how it’s now an on-the-ground, local reality with which to deal. The European Environment Agency (EEA) reveals that the region’s climate losses have increased by 2.9% a year from 2009 to 2023.

“Climate change is happening now — and even if we effectively reduce global emissions, it will continue to impact our lives. Flooding, droughts, heatwaves and other climate-related hazards are becoming more intense, longer and more frequent. These hazards carry significant health and economic impacts.”

Extreme heat, drought, wildfires, and flooding, as experienced in recent years, will worsen in Europe even under optimistic global warming scenarios and affect living conditions throughout the continent, according to the EEA. The European Climate Risk Assessment (EUCRA) has identified policy priorities for climate change adaptation and for climate-sensitive sectors. According to that assessment, many of these risks have already reached critical levels and could become catastrophic without urgent and decisive action.

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Extreme weather events accounted for 85,000 to 145,000 human fatalities across Europe over the past 40 years. Over 85% of those fatalities were due to heatwaves. Economic losses from weather and climate-related extremes in Europe reached around half a trillion euros over the same period. Less than a third of non-human losses were covered by insurance. Closing the climate protection gap by increasing insurance coverage is one method to help to increase Europe’s ability to recover from disasters, reduce vulnerability, and promote resilience.

The Role Of Risk With The Ever-Present Climate Crisis

The fundamental purpose of insurance is to provide protection and transfer risk. Climate risk insurance describes a suite of instruments for financial risk transfer that provides protection against risks arising from extreme weather events that are increasing in frequency and intensity because of climate change. The mechanism can offer protection against loss of life, livelihood, or assets caused by extreme weather events. It ensures effective and rapid post-disaster payments to the insured.

But the insurance industry is finding it increasingly difficult in a time of more widespread, acute, and severe weather events. If no countermeasures are taken, the insurance-protection gap is expected to widen, which is of critical concern for insurers and policymakers alike.

There is fear in Italy and across Europe that just like in much of the US, insurers will abandon the country’s riskiest areas to avoid profit shortfalls.

Insurers in Italy have to accept all clients under the law, and that means there’s no limit to their loss exposure, Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority (EIOPA), told Bloomberg. As a result, the industry is concerned. “How much am I up for, and how do I price this?” Hielkema related.

Across Europe, the financial risk due to the insurance-protection gap is 75%,which is the difference between insured and uninsured losses from climate-related catastrophes, according to EIOPA data compiled from 1980 through 2021. The gap in Italy for all natural catastrophes is roughly 80%. In the US, where insurers have fled states like California and Florida, the gap is a less onerous 42%.

The US Confronts Climate Insurance Instability, Too

As a warming planet delivers more wildfires, hurricanes, and other threats, the once reliable and constant US home insurance market has become the place where climate shocks collide with everyday life.

This week the Senate Budget Committee issued the findings from a yearlong investigation, showing where insurers are dropping customers — year by year, county by county. This is the first time that an accounting of insurance non-renewals at the county level from all 50 states and the District of Columbia has taken place. The analysis covers  the years 2018 through 2023.

The result is a new way to map the growing threats of extreme weather. “The climate crisis that is coming our way is not just about polar bears, and it’s not just about green jobs,” Senator Sheldon Whitehouse (D-RI) said about the investigation’s findings. “It actually is coming through your mail slot, in the form of insurance cancellations, insurance non-renewals, and dramatic increases in insurance costs.”

Key takeaways in the new data:

• Climate change is driving increasing non-renewal rates. The data confirm that the states and counties most exposed to climate-related risks, like wildfires or hurricanes, are among those with the highest non-renewal rates and the highest growth in non-renewal rates.
• Insurance non-renewals are not exclusively a problem for communities typically seen as being on the front lines of climate change. Florida, California, and Louisiana have been seen as the canaries in the coal mine, but the Committee’s data make clear that areas such as southern New England, parts of Montana, coastal and inland North Carolina, coastal regions of New Jersey, New Mexico, South Carolina, and even Oklahoma, among others, are not far behind.
• Across the US there is a clear positive correlation between rising non-renewal rates and rising premiums. There’s also a similar correlation between annual premium rate changes and non-renewal rate percentage point changes over time—demonstrating that climate change has become a major cost-of-living issue for families across the country.

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“Desperation clarifies the mind,” Whitehouse told the NY Times Climate Forward this week. “Once the looming danger of a true, systemic, 2008-style mortgage economic meltdown nears, then it’s time for everybody to pay attention.”