SDG 1: No Poverty | SDG 9: Industry, Innovation and Infrastructure | SDG 13: Climate Action
NITI Aayog | Insurance Regulatory and Development Authority of India (IRDAI)
The ECB Working Paper, Climate change, catastrophes, insurance and the macroeconomy mentions that insurance significantly mitigates the adverse macroeconomic effects of climate-driven catastrophes by accelerating reconstruction and shortening the period of lower output. Analyzing over 5,000 disaster events across 47 countries (including India) between 1996 and 2019, the study reveals that a disaster causing damage worth 1% of GDP reduces growth by 0.2 percentage points in the impact quarter. However, high insurance coverage can mitigate or even avert this decline, as payouts help households and businesses endure post-disaster disruption. The report identifies a substantial “protection gap,” noting that in the EU, less than 25% of climate-related losses are insured. For India, the situation is more acute, with an average insured loss share of only 14.8% across 61 disaster events. As climate change increases disaster frequency, the risk of “insurance retreat”—where coverage becomes unavailable or unaffordable—poses a major threat to long-term welfare and economic growth.
Key Pillars for Strengthening Climate Insurance Resilience
Mitigating Growth Volatility: Higher insurance penetration is directly associated with less severe macroeconomic consequences and a faster return to pre-disaster GDP trends.
Addressing the Protection Gap: Designing public-private resilience solutions to counter the widening gap caused by rising premiums and increasing disaster severity.
Innovative Risk Transfer: Deepening Catastrophe Bond markets and exploring regional risk pooling to improve the affordability and insurability of extreme risks.
Incentivizing Risk Reduction: Aligning insurance policies with land-use planning and spatial regulations to minimize moral hazard and promote managed retreat from high-risk zones.
Financial Stability Linkages: Ensuring that insurance payouts provide the liquidity needed to prevent temporary disaster shocks from turning into systemic financial vulnerabilities.
What is the “Climate Insurance Protection Gap”? The “Climate Insurance Protection Gap” refers to the difference between the total economic losses caused by natural catastrophes and the portion of those losses covered by insurance. The report finds that this gap is a significant macroeconomic risk, especially in emerging economies like India where only 14.8% of losses are covered. A large gap means the burden of reconstruction falls on the state or private savings, leading to persistent GDP losses and reduced welfare as climate change makes disasters more frequent or severe.
Policy Relevance
The February 2026 ECB findings represent a transition from reactive disaster relief to a “Risk-Transfer” macroeconomic strategy. As India—with its low 14.8% insurance penetration—faces increasing extreme weather, the Ministry of Finance must prioritize closing the protection gap to safeguard the “Viksit Bharat” growth path.
Strategic Impact:
Cushioning GDP Shocks: With 61 recorded disasters showing a mean damage of 0.10% of GDP, scaling insurance can prevent the recurring 0.2 percentage point growth dips identified in the study.
Reducing Fiscal Burden: Moving away from ex-post government relief to ex-ante insurance allows for better Debt-to-GDP stability during high-intensity climate years.
Incentivizing Private Capex: High catastrophe insurance coverage provides the “risk-certainty” required for private capital to invest in climate-exposed infrastructure projects.
Promoting Managed Retreat: The Ministry of Housing and Urban Affairs can utilize insurance risk-mapping to enforce stricter land-use regulations in flood-prone coastal cities.
Follow the full report here: ECB: Climate change, catastrophes, insurance and the macroeconomy