 for our first part of the workshop on the discussion, really the presentation of the discussion paper of the policy options to reduce climate insurance protection gap. To introduce the speakers, on my right, maybe your left, I have Dimitri Saferes, Head of Risk and Financial Stability Department of Iowa. On my left, I have Sujit Kappadiya, Head of Market Based Finance Efficient at the European Central Bank. Both division have been working together, so I'm really pleased to have you here to set the scene. If we have time for questions for the people joining online, please put them in the chat and my colleague Margarita will read them out on the laptop. And otherwise, I invite the people here in the room to walk to the laptop. But I have to be cautious of the time, so let's see if we have enough time left for these questions. So with that, I would like to give the floor to Dimitris to start the presentation on the discussion paper, please. Dimitris. Thanks, Irana, and good morning also from my side. Let's perhaps start by setting the scene and I'll try to be brief here. The paper discusses the protection gap, how it affects the economy and the society, what may be the impact of climate change on this protection gap, and possible policy options to tackle it. By protection gap, we mean the uninsured portion of the economic losses caused by a catastrophic event. And for the purposes of our discussion today, we focus on climate-related natural disasters. I think it was mentioned also by the vice president of ECB, only about a quarter of the losses caused by extreme weather and climate-related events in the EU are currently insured. And in several countries, this share is below 5%. Using as a source the AEOPA risk dashboard for the protection gap, the chart on the graph on the right-hand side, provides an overview of the average coverage per country. There are differences and there are all various reasons also why that explain this protection gap. These reasons range from misconceptions regarding severity and likelihood of catastrophic events to disposable income, but sometimes also other structural reasons. Now, with the situation being what it is, the climate change is expected to pose additional challenges. As catastrophes become more frequent and more severe, insurance becomes more valuable from a macroeconomic but also societal perspective. Of course, with wild private insurance coverage is beneficial and desirable, insurance provision should be carefully designed to ensure that it encourages adoption and reduces vulnerability to climate-related catastrophes over time. Now, the design of insurance policies can provide incentive to policy holders for risk reductions and adaptation while limiting moral hazard. For example, via impact on the writing, we'll say a couple of words more on that as we proceed. At the same time, as insurance claims increase due to climate change, perhaps, premiums are likely to increase as well and or coverage to fall, thereby further widening the protection gap. One could indeed expect that the catastrophe of insurance protection gap could widening the medium to long-term as a result of climate change, partly because of repricing of insurance contract in response to increasingly frequent and intense events. This may lead, of course, to such insurance, to insurance becoming unaffordable. And as mentioned already, this would further increase the burden on governments, both in terms of macro impact, macro risks, but of course on fiscal spending to cover the uninsured portion of losses. That is, higher losses due to climate change may put pressure on the microeconomic and financial stability. So what is this impact to the macroeconomic, what is the impact to the economy and the financial stability? Climate-related extreme events can cause significant economic disruption that may persist over time. Direct aggregate losses in the EU amounted to approximately 500 billion in the period between 1980 and 2020. While this implies that the average impact per annum has been quite limited, approximately perhaps even less than 0.1% of GDP, this does not necessarily hold true for specific years that the losses can be more significant. In addition, the relevant literature indicates that the costs of climate-related macroeconomic effects of natural catastrophe are expected to rise across EU countries for the course of this century. Here, catastrophe insurance plays an important role in mitigating the negative macroeconomic effects of disasters in various ways. First, it enables the economy to recover faster by providing the necessary funds for reconstruction and limiting the period of lower output. Second, catastrophe insurance can increase resilience by improving the understanding and assessment of climate change risks and promoting risk reduction and adaptation measures. And third, it allows the mutualization of risks which is an important factor in this context and they're transferred to private insurance and reinsurance companies which can provide expertise and incentives for resilience, efficiency and reliability. Empirical evidence confirms this, confirms that the impact of disasters in GDP growth depends on insurance coverage. We can see this perhaps taking a quick look at the graphs of the right-hand side again For example, here, a large-scale disaster can cause over 0.1% of GDP worth of direct losses. This is a clear, let's say, hit at the GDP due to the impact of this catastrophe event. This can have an impact, a second round impact of around 0.5% as points in the quarters and in the following quarters if the share of uninsured losses is low. This happens because in addition to direct losses, there may be disruption of economic activity, production, et cetera. The adverse effect on GDP growth also persists over the subsequent three quarters. However, if a high share of damages is covered by insurance, the indirect impact of GDP growth will be significantly reduced. And this brings us back to the relevance of catastrophic insurance and why a widening of the insurance protection gap may pose financial stability threats. This potential impact on GDP growth and financial stability and the relevance of catastrophic insurance and the impact of production gap motivated the cooperation between ECB and AOPA and was already mentioned by Ren and our chairperson. It was and still is an excellent cooperation between these two EU institutions bringing together experts of various disciplines, insurance, re-insurance, economics, financial stability and climate, of course. The results of this cooperation is this joint discussion paper as we frame it, outlining policy options to address climate insurance protection gap in Europe. It highlights the need to complement ambitious mitigation policies to tackle climate change with more efficient financial protection against climate-related catastrophes. Now, this effort should be complementary to any existing mitigation policies to tackle climate change. And it should not be seen in isolation or of course as a substitute to such policies. The discussion paper, and you will hear us saying it a couple of times today, it does not present firm conclusions on specific policies that need to be implemented as they are. The case here and the idea is that there are a number of stakeholders that they are relevant on such topics that go beyond supervisory authorities or certain banks. So the aim here is to spark a discussion and receive feedback on possible policy options to tackle the protection gap. Change of slides. So in order to do so, we start by setting out some basic principles or objectives that in our view, ought to underlie any policy options to reduce the climate insurance protection gap. This could include and at least aim at providing prompt insurance claim payouts after a natural disaster. This was mentioned already, the relevance of having prompt capital, let's say injected back into the economy. It should also incentivize risk mitigation and adaptation measures. You may be familiar with the term impact underwriting. This is underwriting and pricing strategy aimed at incentivizing the policyholder to implement exante structural measures that reduce exposure to climate related hazards. For instance, you could have premium discounts that provide incentives to implement adaptation and mitigation measures that minimize physical risk exposure to climate related events. But not only at the individual level, as you will see later, also when Sujit presents the latter approach, these preconditions, there may be some preconditions that can also incentivize adaptation measures at the country level. Now policy options are also designed to be complementary to existing insurance covered mechanisms, require, as we say, that all relevant stakeholders have skin in the game. And policy options should ensure that the costs and responsibilities associated with having a resilient Catastrophic Insurance Coverage Program are shared between the public and the private sectors, keeping, as we said, skin in the game retained also on the latter. Furthermore, policyholders should also retain part of the risk in order to mitigate potential moral hazard or could alternatively be offered reduced premiums, as mentioned already in return for implementing risk mitigating measures. Finally, and this is also very important, another aim of such, let's say policy options should be to lower the share of economic losses from major natural disasters borne by the public sector, at least over the long term. The purpose of our discussion today and your policy options described in the paper is not to provide an unconditional tax payer funded financial guarantees for uninsured losses but rather to enhance efficiency in the way public funds are used and reduce moral hazard relative to the typical status quo of unconditional and sometimes poorly targeted government support as it stands today. Over time, they should help ensure that private insurance markets contribute to and function in an orderly manner that in the face of climate change, in use risks and reduce the need for government financial intervention. I think now I will pass the floor to my colleague from the ACB who will go a bit more into the details of the policy options and we will be happy at the end as I mentioned already by rent to take any questions. Thanks very much, Dimitris. And as you said, I will set out turning to the next slide some of the policy options that are set out in the discussion paper in a little bit more detail. So we summarise those in a ladder approach which you can see on this slide and that's designed to address the losses borne by various parties at different loss layers. There are four rungs to that. The first two layers focus in particular on enhancing private insurance, reinsurance markets which should remain the first and primary line of defence and that includes both traditional insurance and reinsurance but also greater use of alternative risk transfer in particular instruments such as catastrophe bonds. Then we consider the role that national public authorities can play including by providing a public backstop through, for example, public-private partnerships and finally we show how risks could be pulled at a European level. So let's go through those steps one by one. Turning to the next slide, we focus firstly on, as I said, on private insurance and there are several aspects to improving the design of private insurance products. As Dimitrius has already said, impact underwriting can play a very important role here and we think that it may be valuable that insurers design their policies to encourage households and firms to better adapt to climate change to reduce their exposure and also to increase their resilience. There are different possibilities here. For example, risk-based premiums are likely to be important in setting the right incentives for policy holders and as Dimitrius mentioned, there could also be premium discounts in relation to taking adaptation measures. So for example, if you flood-proof your home and you're in a flood-prone area, then you can get a discount on your insurance premium. Beyond that, we also think that there could be a role for greater consistency and information in relation to private insurance and that can play an important supporting role in fostering the deepening of private insurance markets. So that could include enhanced coordination between the public and private sectors in relation to risk assessment practices and standards. But in addition, there could also be value in information campaigns targeted at policy holders, which are ideally focusing on the granular information about the risk exposure of the policy holder at local level and potential adaptation measures and their potential effectiveness that policymakers could take. And we think that sort of informational and awareness raising could be useful in helping to combat behavioral traits and information constraints that may hinder the take-up of private insurance that are beyond the affordability and access. The next run involves reinsurance and a greater use of capital market instruments such as catastrophe bonds. Now, catastrophe bonds can help insurers to pass on part of the risk to a broad set of investors in capital markets and they allow the issue to receive funding for reconstruction from investors if a disaster occurs within the maturity of the bond. And if that doesn't happen, the issue pays a regular coupon to investors. And the benefits of these instruments, which we set out on the slide, but they can provide high diversification for insurers because part of the tail risk is passed on to capital markets. In addition, they can tap a broader set of capital market investors and provide higher capacity. And together, these dimensions may help to lower premiums overall. In addition, they're typically structured as multi-year contracts with locked-in rates, which can also help to reduce the risk of abrupt exit and can help to lower price volatility. So they have several potential advantages. They may also be susceptible to investor sentiment. So there is a complementary role. Reinsurance continues to have strong value, but catastrophe bonds may be particularly useful alongside. So we think that deepening catastrophe bonds markets could be very valuable in supporting the overall supply of insurance. There are several possible options that we set out in the discussion paper, which could be valuable in that regard. For example, reducing issuance costs, simplifying the issuance process, potentially issuance by the public sector. There are obviously public sector issues, for example, the World Bank that have been very active in these sorts of markets. But we think that deeper public sector issuance could be valuable. It could also be an investment option in terms of governments or EU schemes that I've come on to. And more broadly, we think that there may be a role that deepening a capital markets union more generally in the EU, which could help to promote the depth and liquidity of markets in a more general sense and has a lot of other benefits, could also be valuable in helping to deepen catastrophe bond markets as well. Let me now turn to the public sector. And I think here it's important to start by noting that fiscal spending after disasters is likely to remain an important part of the catastrophe relief, even with better incentives for private insurance, even with deeper catastrophe bond markets. Public sectors likely to remain on the hook for some losses, notably for public infrastructure, but also just from uninsured portions that may have significant welfare and macroeconomic consequences. And this suggests that it's important that the public sector is better prepared to deal with these rising catastrophe risks. Now, as Dimitri said, it's important to make clear that the objective here is not to provide blanket guarantees, but rather to lower the short share of losses borne by the public sector, reduce moral hazard. And that's relative to a status quo where we often have unconditional government support after disasters. So that's a really important upfront objective. So in this regard, we think that moving towards ex ante strategies is going to be very important. So disaster risk management strategies which are set through and set out ex ante will make it easier to manage fiscal costs and the associated risks from catastrophes. That can include precautionary measures such as spending on climate adaptation, things like seawalls or irrigation, but also measures on the vulnerability of buildings, planning rules that determine the location of exposures, climate change, resilient public investments are also likely to be important. So that's in terms of the adaptation side of the story. In addition, fiscal preparedness in a general sense would be very useful. That one aspect would be to include climate-related catastrophes into international debt sustainability assessments, but also the role of building fiscal buffers at a national level to provide contingencies that help to mitigate sovereign risks upon disasters striking. The discussion paper also spends quite a bit of time talking about public-private partnerships which can play an important role in improving risk assessment preventing, sorry, can we stay on the current slide, which can improve risk assessment, risk prevention, and facilitate risk transfer while also providing a public backstop to private reinsurance. As was noted by the vice president, they already exist in some European countries and they can partly cover the cost of insurers that insurers may occur in the event of major disasters either via direct insurance or via acting as a reinsurer of last resort. And they can build in effective incentives for risk mitigation adaptation. So we set out some key principles that public-private partnerships should ideally have as you can see on the slide for them to be efficient and effective. And that includes risk sharing so that the cost and responsibility are born across public and private sectors. The important of setting the right incentives for prevention and adaptation measures so that a moral hazard is also mitigated and that adaptation measures are implemented and partial insurance so that only a portion of the economic cost is insured again to help mitigate moral hazard. Finally, the last rung on the ladder we discuss is a possible EU-wide public-tester scheme to cover larger, rare but larger climate-related catastrophes. And we think that such a scheme could complement and reinforce national measures and help to more efficiently pull catastrophe risks which typically are hitting different EU countries at different times and have a mild correlation. So we see that a lot of major EU countries, all EU countries are facing climate-related catastrophes but different countries are exposed to different hazards and different vulnerabilities. So we think that such a scheme could and foster risk pooling at the EU level but also complement the EU's wider climate policies and existing tools for disaster relief such as the EU Solidarity Fund which may be constrained by a lack of financing power currently. And such a scheme could, in principle, ensure new risks, provide different support or on different terms. On the right, we set out some of the key principles that a public insurance scheme might adhere to which are discussed in more detail in the paper itself. I'll just highlight a few. We think it would be likely to be important that it should cover all EU-wide or be subscribed to by the whole of the EU and covering all large-scale climate disasters and have sufficient financing powers, I've already mentioned, with part of the support also being provided as grants, so some degree of mutualisation. At the same time, in any such scheme, it's also going to be important to have safeguards to ensure member states improve their own resilience to catastrophes rather than solely relying on relief from the EU. And that can be done, for example, by partly linking contributions to actual risk exposure, so the partly risk-based contribution principle, and also granting access only once member states have implemented and agreed adaptation strategies and perhaps met their emissions reduction targets. So that's the idea to incentivise adaptation and also incentivise measures to be taken at the national level. So to sum up and to turn to the last slide, the policy ideas we've set out in the paper are aiming to reduce the climate insurance projection gap at four levels around private insurance, firstly, enhancing re-insurance and catastrophe bond markets, developing public-private partnerships and the role that the national authorities can play, and finally a potential EU-wide fund for national disaster insurance. It's important to say that these are very much policy options. The purpose of setting out this discussion paper was really to elicit feedback on these ideas and we are inviting comments and feedback on all aspects of the discussion paper, ideally by the 15th of June, but we're also very interested to hear your questions and comments during the workshop today. And subsequent to that, we will be undertaking further analysis of the options, taking into account the comments that have been, that we receive today in written form and through other fora and engagement that we will be having in the coming weeks. With that, I will say thanks very much and I will pass it back to Erena. Thank you. Thanks so much to both Sushit and Dimitris for setting out the content of the paper so clearly and setting out the ladder on what are the policy options and how to increase the involvement over time of the different actors in the whole space and also which responsibilities everybody should have in this regard. I see that we still have some time for some questions so that's a good sign and I hope we have questions from the room but let me kick off with one because maybe not everyone here today joining online or in the room is so familiar with the mandates of IOPPA and the ECB. We've been talking about that you took it for granted so maybe Dimitris, can I invite you first to set out a bit? What is the role of IOPPA in this regard? Why, what are you doing and how do you complement also the work of the ECB? Where is it different? Where do you work together? Indeed, when you deal with the insurance protection gap is what we call the protection gap paradox, why? Because IOPPA being an insurance supervisory authority one would say that supervisors should care more about the risks taken than the risks not taken so you would say that as a direct supervisory authority you should not really worry if there is let's say a part of the market that is that the insurance sector is not exposed to risks nonetheless, yes, this may hold true in the short term so perhaps within a year and the fact that most non-life products are annually reprised or the contracts expire within a year this you may say well from a short term view on the financial stability of the sector this is true. Nonetheless, going a bit to the medium or long term the financial stability of the role is affected which in turn will impact the sector back so if you're talking about events that occur that will impact the economy, the impact of financial stability of the whole financial system it will in consequence also affect the profitability of insurance pensions but as said already of the overall economy and this let's say the impact on financial stability is the common point between our mandate and our point of interest with our ECB colleagues and of course very relevant to the discussion on the protection gap. Thanks so much Dimitris Sujit, do you have anything to add on this? Thanks very much, I mean starting obviously with the financial stability I know that's quite central to our thinking here as Dimitris has already mentioned and that also affects the banking sector so for example risks associated with a lack of insurance may trigger higher capital needs on the banking sector and reduce credit supply because the collateral is less valuable and the collateral that banks are taking in response to loans in addition they're giving supply chain disruptions through operating two firms which increase credit risk throughout the financial system so the lack of insurance can have financial stability consequences and actually one of the things we also briefly touched on in the discussion paper sort of a related policy area is that there may be a potential role for targeted prudential or macro prudential regulations in relation to enhancing the actual resilience of the banking sector to the implications of the persistent insurance protection gap and we've been also discussing those with our colleagues working on the supervisory side of the ECB so there's a clear financial stability aspect there is also a macroeconomic dimension as Dimitris mentioned we see that natural disasters have a more significant macroeconomic impact when insurance coverage is low that has implications for GDP can have implications that may speak to wider issues around the stability of growth and the stability of inflation or price stability and also the fiscal consequences that may affect sovereigns can also put pressure on debt sustainability that obviously can have financial stability implications but it also may mean that there are asymmetric effects from shocks across the EU now we saw that in a very extreme form with the onset of the pandemic but we also think that climate related catastrophes can have significant macroeconomic consequences and also implications for the fiscal dimension so there's a financial stability dimension but also the macroeconomic dimension Thanks so much and if I see that you both brought in different perspectives but could you have done this by yourself or what was really the benefit of this joint like how did you complement each other can you give a concrete example maybe on data or on anything else If I may start in addition to what I said bringing different disciplines in one table and discussing and to which it knows we have been discussing for quite some time with a good number of colleagues I think it is the fact that first of all you said the same you acknowledge the fact with hard data that when the protection gap is quite large the impact on the macro side is quite more significant then you need to apply to explore different solutions different ways of dealing with it and then the insurance mindset insurance and reinsurance mindset try to have some kind of I think it was mentioned before insurance of last resort is there a role for the public sector to take on board this role and having let's say a mindset that has an insurance risk based approach to not cut events is where the insurance expertise may kick in and complement the more financial stability and macro look in addition to what was mentioned already the impact on the banking sector and second round effect you know very much subscribe to that I think AOPA clearly bring expertise and information and data in relation to insurance markets and reinsurance markets catastrophe bond markets I think from our side we bring expertise in relation to macroeconomic dimensions, financial stability is a common dimension but also within the ECB colleagues working in our financial stability area have clearly been working on this in our economics department and our international department reflecting it's very diverse expertise also within the ECB and I think that brings complementary perspectives I also think it's just this is a common goal and I think was mentioned in the opening remarks that by working together we can think about better ideas, better solutions but also working towards that common goal brainstorming those ideas and feeding off each other I think leads to better better thinking and better discussions I think it's been extremely valuable to work together from that perspective Thanks so much and it sounds even like fun so that's a good answer I see that we have one question from the chat Margie, can I give you the floor? Yes thanks a lot Irena, so we have a question from Diana Radu from the European Commission who says with an average of 25% insured losses there seems to be an issue of insurance demand other than insurance supply what can public authorities and the insurance sector do to address this insurance demand issue while avoiding to make insurance compulsory Thank you Diana Sushit, Jimmy please Let me try at least to bring the AOPA perspective into this one that's a very relative question because it touches upon the issue of the demand side when it comes to insurance so what drives demand which is something that from a supervisory authority you cannot only assume so what we have done and is currently going at the AOPA side we are currently running a survey trying to better understand the demand side I think we mentioned already during the presentation that there are some structural reasons sometimes misconceptions regarding risk sometimes it's also disposable income but the point is to try to better understand it so we have done this survey and we will publish some of the outcomes of this survey now in June and I think we will all get one step of understanding the demand side and again 25% is the average in the areas in Europe that's much lower than that so there is a lot of work to do trying to understand what drives demand Thank you Dimitris Sushit, I think you are right I think Dimitris has summarized well as I said also there is a question as I mentioned in my presentation a question about raising information raising awareness and those sorts of campaigns can be a very important part of Dimitris role as well Thank you so much Margie you have another question Yes we do from Kuba Gogolevsky he is asking how would you be able to ensure that when addressing the climate gap only entities which are aligned with the EU climate mitigation goals are able to benefit from this public guarantee and would the public support be conditioned on some reconstruction enabled to ensure the insurance payout ensuring climate mitigation as well Thank you Kuba Excellent question so what kind of conditionalities can you tie to funding Sushit Again these are all policy ideas at that stage but as I said when discussing the EU wide scheme one possible thing that we have mentioned in the discussion paper is that the access to that scheme will be conditional on countries that are using the EU and that is at the national level I think the question was a little bit at the firm level I think one could as well as in principle I don't think we spend a lot of time discussing that but I think it's a good thought is that when designing public private schemes which are ultimately and allowing firms or companies to access those schemes or indeed even households that potentially is related to sustainability in relation to the transition to a low carbon economy so I think that is certainly a topic that warrants consideration I think it's a useful thought and I think one could also think about this at the level of the firm or the household beyond just being at the national level that I discussed in the presentation So not only conditionalities tie to preventing physical impact on limiting the footprint Dimitris, do you have anything, any views on this? Just what I think it is a very relevant question is that the core of the ladder approach that was presented which starts and ends with adaptation and mitigation strategy at the individual level so at the policyholder level when perhaps to go to some kind of national country support you do need to have the policyholder having skin in the game as Sujit just mentioned going to the next step going to any kind of EU support needs to be into some type of conditions whether the country has implemented relevant policies on the greening of the economy but also if they have proceeded in some kind of infrastructure measures also to let's say mitigate the impact of any kind of natural catastrophe events so at the core of this ladder approach is some conditionality on mitigating measures and adaptation I should say there was a question about reconstruction activities and I think when one is thinking about reconstruction activities I think to the extent that one can embed in those reconstructions so for example household housing has been destroyed by a flood that you build back energy efficient homes in that area seems to be a very sensible thing to do is that's just a small example but I think the point about ensuring that reconstruction and net zero strategy I think would be a sensible thing to also consider in this regard Couldn't agree more Sujit I think we're right on time now to close the first part of this workshop today