European Central Bank working paper finds higher catastrophe insurance coverage reduces GDP losses from disasters

The European Central Bank published a working paper on how catastrophe insurance affects the macroeconomic costs of climate-related disasters, finding that higher insurance coverage is associated with less severe GDP impacts and warning that falling coverage as warming intensifies could amplify future losses. The paper develops a stylised growth model in which insurance supports faster reconstruction by providing prompt liquidity, with larger risk pooling strengthening these benefits. It then tests the model using several thousand disaster events across 47 developed and middle-income countries between 1996 and 2019, concluding that a catastrophe causing damage worth 1% of GDP is linked to a roughly 0.2 percentage point fall in GDP growth in the quarter of impact, while a high share of insured damages can avert the initial drop and associated GDP differentials may persist over time. For large-scale disasters, low insurance coverage is associated with a drag on annual GDP growth for several quarters, whereas high-coverage events do not show a significant deviation from trend. The authors highlight a substantial climate insurance protection gap, noting that less than a quarter of natural catastrophe losses in the European Union are insured and that coverage is below 5% in several countries, and point to policy options such as boosting private insurance penetration, developing public-private resilience solutions, deepening catastrophe bond markets, and potentially expanding regional or European risk pooling, while emphasising the need to limit moral hazard and maintain adaptation incentives.