Europe’s heatwaves expose insurance gap as business losses mount

Europe's recent heatwaves have highlighted a significant insurance gap as business losses mount, according to estimates from Moody's. Last summer's extreme temperatures in Europe are believed to have cost the economy €43 billion in lost output, but insurers only paid out about €500 million in compensation. The Italian city of Padua, known for its traditional evening aperitivo, has seen the practice shift later indoors due to the heat, resulting in a potential 20% decline in sales for many hospitality businesses, as reported by Federica Luni, president of the APPE Padova hospitality association.

Heatwaves are increasingly impacting Europe's economy, reducing productivity, curbing consumer spending, and raising operating costs. Insurers face challenges in covering these indirect losses, as heat often causes operational disruption rather than property damage. Swenja Surminski, managing director for climate and sustainability at Marsh, explains that extreme heat rarely causes catastrophic physical damage like floods or storms, but the financial disruption it creates can be equally severe.

A 2023 survey of 9,000 small and medium-sized firms for Europe's insurance regulator found that only 28% held business interruption cover as part of their property insurance, while 17% had non-damage business interruption protection. The protection gap is growing as the economic costs of extreme heat continue to rise. Heatwaves often interact with other climate-related risks, such as drought and wildfires, making them harder to model and insure.

To address this gap, insurers are turning to parametric insurance, which pays out automatically when temperatures exceed predefined thresholds. This approach eliminates the lengthy loss-adjustment process associated with traditional indemnity-based insurance. The European market for parametric insurance is projected to reach US$7.93 billion by 2031, growing at a compound annual rate of 9.5% between 2025 and 2032.

While the adoption of parametric insurance could help businesses mitigate the financial impact of heatwaves, many will likely need to focus on adapting their operations through cooling technologies, workplace redesign, and supply chain stress-testing to better withstand the increasing frequency of extreme heat events.