European Central Bank Banking Supervision published a contribution by Supervisory Board member Patrick Montagner on how physical climate risks are affecting banks and how insurance can and cannot mitigate those risks. The article frames climate-related physical risk as a material prudential issue and argues that banks need to understand and manage exposures rather than relying on insurance coverage alone. Supervisory work is cited as showing that physical risk management remains less advanced than transition risk management, with shortcomings in granular exposure identification, forward-looking hazard assessments, and the integration of physical risks into credit decisions and pricing. The ECB’s 2022 climate risk stress test found that physical risks were already relevant for many banks and that certain portfolios faced non-negligible losses, while Pillar 3 disclosures since 2023 have increased transparency but still show limited capabilities to estimate related losses and that around 90% of banks consider themselves materially exposed. On mitigation, the contribution highlights EIOPA’s estimate that only around a quarter of climate-related losses in the EU are insured, with wide cross-country variation and uneven business interruption coverage, and notes structural challenges for banks in monitoring insurance over multi-year loan horizons given typically annual contract renewals and changing terms. ECB Banking Supervision indicates it will continue analysing these issues under its 2026-28 supervisory priorities, including further work on physical climate risks.
European Central Bank - Banking Supervision 2026-03-24
European Central Bank Banking Supervision publishes analysis on physical climate risks and the limits of insurance-based mitigation
The European Central Bank Banking Supervision published an article by Supervisory Board member Patrick Montagner on the impact of physical climate risks on banks, emphasizing the need for banks to manage exposures beyond relying on insurance. The ECB's findings reveal that physical risk management is less advanced than transition risk management, with significant gaps in exposure identification and integration into credit decisions. Only about a quarter of climate-related losses in the EU are insured, with ECB planning further analysis under its 2026-28 supervisory priorities.