Will the (re)insurance sector hold its ground while climate change is making the ground shake more than ever?

As climate change intensifies floods, storms, and heatwaves, the foundations of the (re)insurance sectors are being tested. This article explores whether natural catastrophes will remain (re)insurable in Western Europe, and what that means for Belgium, where exposure and premiums are both rising. Drawing on unique industry data, it highlights how climate risk is reshaping financial resilience and why urgent reform is needed to keep protection affordable.

Introduction

The (re)insurance sector has long been a cornerstone of financial stability, protecting households, firms, and governments against the devastating costs of natural catastrophes. By pooling risks and redistributing them through global capital markets, insurers and reinsurers function as a financial shock absorber that accelerates recovery after disasters.

In Belgium, the importance of this role became painfully visible after the 2021 floods, which caused more than €40 billion in economic damage, of which only a fraction was insured. Such events expose the fragile balance between risk coverage and affordability.

Today, climate change is reshaping the very risks on which this system is built. Rising temperatures are increasing both the frequency and severity of floods, storms, and heatwaves. These events not only produce higher losses (Figure 1), but also undermine one of the sector’s foundational principles: that risks are largely independent and therefore diversifiable. When catastrophes become more systemic and correlated, this assumption breaks down. The critical question, then, is: ‘Will natural catastrophes remain (re)insurable in the future, and under what conditions?’

A unique study with industry data

To address this question, a detailed empirical study of insurance and reinsurance pricing in Western Europe was conducted in collaboration with QBE Re Brussels. The dataset spans more than two decades of insurance premiums and catastrophe losses for Belgium, France, Germany, and the Netherlands between 1999 and 2025, complemented by detailed reinsurance contracts for the period 2020 to 2025. Unlike most existing studies that rely on aggregate statistics or hypothetical scenarios, this data provides a granular view of how both insurers and reinsurers are adjusting to climate risk in real market conditions.

The relevance for Belgium is direct and pressing. According to the National Bank of Belgium (2024), reinsurance premiums charged to Belgian insurers have risen by 50 to 60 percent in just two years. These increases have already been passed on to households through higher premiums, raising concerns over affordability and the long-term viability of catastrophe coverage.

Methodology in brief

The study applies fixed-effects panel regression models to identify how catastrophe frequency, event severity, and inflationary pressures affect premiums. Country-level fixed effects account for structural differences such as national regulation and insurance schemes, while firm-level effects capture the role of individual underwriting strategies and portfolio composition. Time fixed effects are included to control for broader macroeconomic and environmental conditions.

Five models were estimated: two for the insurance sector at the country and insurer levels, one for reinsurance pricing, and two combined models that allow comparison across sectors and test for spillover effects between reinsurance and insurance. This layered approach makes it possible to distinguish sector-specific dynamics from shared vulnerabilities.

Empirical results

The results for insurance pricing are discussed first. The analysis shows that climate-related risks are increasingly reflected in premiums, but in different ways depending on the level of analysis. At the country level, catastrophe frequency emerges as the dominant driver of price increases. In years with more frequent storms and floods, national premiums rise significantly, reflecting insurers’ adjustments to repeated losses. At the level of individual insurers, by contrast, the severity of single catastrophic events proves more influential. The 2021 Belgian floods, for example, caused such exceptional losses that insurers revised their pricing strategies far more sharply than they would in response to a series of smaller events.

Turning to reinsurance pricing, the patterns differ. Reinsurers react less directly to climate variables and more to the structural features of their contracts. Instead of simply raising prices when risks increase, they adapt by reshaping coverage, focusing more on the most severe events while shifting moderate risks back to primary insurers.

Finally, the combined models highlight a shared vulnerability to systemic catastrophes, which undermine diversification strategies across both sectors. Interestingly, the analysis finds no statistically significant evidence that changes in reinsurance prices directly drive insurance premiums within the observed period. In practice, insurers seem to absorb reinsurance cost increases through structural adjustments rather than immediately passing them on to households.

Implications for Belgium

For Belgium, the study’s findings are particularly sobering. With relatively high exposure to river and pluvial flooding, combined with a comparatively small insurance market, Belgium lacks some of the scale advantages that larger European markets enjoy. Figure 2 illustrates this vulnerability clearly: Belgian insurance premiums show a steep upward trajectory in years following large flood events, such as 2021, reflecting the sharp adjustments made by insurers after catastrophic losses. By contrast, countries like France or Germany show smoother patterns, where market depth helps to absorb shocks more gradually.

This volatility matters because it translates directly into affordability risks for households. When premiums rise steeply after a single catastrophic event, low- and middle-income families may find coverage too expensive. If participation in the insurance pool declines as a result, those who remain insured face further premium increases, triggering a vicious cycle of shrinking risk pools and worsening affordability. Such dynamics, already documented in flood-prone regions in the United States and Australia, could gradually erode the resilience of Belgian households.

The Belgian market also faces a potential availability problem. In high-risk areas, insurers may choose to cap coverage, impose stricter exclusions, or even withdraw altogether. After the 2021 floods, several insurers signaled the need to revisit their risk appetite in flood-prone zones. If this trend accelerates, households in the most exposed regions risk being left uninsured, leaving the state as the insurer of last resort. This would not only shift financial burdens onto taxpayers but also create political pressure for ad hoc interventions after disasters, which are typically more costly and less efficient than pre-funded insurance solutions.

Policy directions

These Belgian-specific vulnerabilities underscore the urgency of structural reforms to safeguard insurability in the face of climate change. One option is the creation of stronger public-private partnerships. State-backed catastrophe schemes provide a useful model: by pooling risks nationally and offering a government guarantee, it smooths volatility and maintains affordability across high- and low-risk areas alike. For Belgium, a similar approach could help avoid sharp post-event premium spikes.

Second, targeted subsidies should be considered to support vulnerable households. Insurance affordability is not just an economic issue but also a matter of social equity. Without intervention, climate change risks creating new forms of financial exclusion, where those least able to pay are also those most exposed to catastrophe risks. Subsidies tied to income levels, or mechanisms that cap the share of household income spent on premiums, could provide a safety net.

Third, investments in risk reduction are critical. Belgium has made progress in flood defences and water management but rising climate volatility demands further action. Strengthening dikes, restoring natural floodplains, and enforcing stricter building standards in exposed zones can reduce underlying risks and, by extension, future insurance costs. Every euro spent on prevention reduces the pressure on the (re)insurance system to raise premiums after disasters.

Finally, Belgium could play a role in advancing financial innovation. Catastrophe bonds and insurance-linked securities, which transfer risks directly to global capital markets, have become increasingly common tools for spreading extreme risks. Because their returns are largely uncorrelated with local catastrophe cycles, they add resilience to the overall system. While the Belgian market alone may be too small to develop such instruments, participation in EU-wide initiatives or partnerships with international reinsurers could provide access to these alternative risk-transfer mechanisms.

Conclusion

The empirical evidence demonstrates that climate change is already reshaping the pricing behavior of insurers and reinsurers in Europe. While insurers respond to both the frequency and severity of catastrophe events, reinsurers primarily adapt through contract structures. Together, these dynamics are leading to rising premiums, shrinking risk pools, and the risk of market withdrawals in highly exposed regions. For Belgium, the lesson is clear: without proactive reforms, the financial protection provided by the (re)insurance sector may weaken just as climate risks intensify. Preserving insurability will require coordinated efforts between policymakers, insurers, and reinsurers to balance solvency, affordability, and societal resilience.

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