Howden: EU unprepared as agriculture weather losses set to reach 40 billion euros annually by 2050

By Henry Gale

May 20 - (The Insurer) - Only 20% to 30% of extreme weather-related losses to agriculture in the European Union are insured, Howden said on Tuesday, with climate change set to increase average annual losses from 28 billion euros ($31.5 billion) to 40 billion euros ($45 billion) by 2050.

A report produced by Howden for the European Investment Bank and European Commission and published on Tuesday said the EU was "largely unprepared for current, foreseeable losses from weather and climate risks." It recommended the EU adopt new risk pooling mechanisms and transfer risks to reinsurance and capital markets.

"Approximately 20-30% of EU yield-related losses are covered by insurance or pre-arranged contingency finance, and much less in some highly exposed countries," the report said. "The remainder is borne mainly by farmers and the public sector through ad hoc disaster payments or indirect expenditure."

The study found that the countries with the largest agriculture systems had the greatest absolute risk, with annual losses for Germany, France, Italy and Spain averaging between 2 billion and 3 billion euros. The risk to some smaller countries is higher as a proportion of their GDP.

Drought poses the greatest threat to agriculture across all European regions, Howden said, but changes in temperature could also see some crops bud and flower earlier, making them more vulnerable to frosts. Hail and flooding will also become more frequent and intense.

The broker's policy recommendations included using reinsurance and cat bond markets to increase the capacity of central EU emergency funds. The EU's common agriculture policy reserve has been used ad hoc to support member states and "the fund risks excessive demands and potential exhaustion in a catastrophic loss year," Howden said, describing a parametric drought cover as a hypothetical solution.

Howden also said the EU could support member states to acquire parametric covers aligned to their own national exposures with limited premium financing. Over time, member states could share climate-related agriculture risks in a multi-sovereign risk pool, the broker continued, in a similar model to other regional pools such as CCRIF SPC and the African Risk Capacity.

Massimo Reina, CEO of Howden Re International, said the broker was seeing growing interest for EU agriculture risks from global reinsurers and capital markets. "Innovative financial mechanisms like catastrophe bonds and risk pooling can provide farmers, governments and the EU with the tools that they need to attract significant private sector capital to share in the risks and help secure our food systems," he said.

Gelsomina Vigliotti, vice president of the European Investment Bank, said mitigating climate risks through insurance was essential to support the investments of European farmers and that the report would guide its future action.