Damage caused by extreme heat is usually not covered by insurance. In Europe, insurance companies are turning to “parametric” policies
For at least a century, the cafés in Padua have been preparing around 6:00 p.m. for “aperitivo” time, an afternoon drink that gave passersby a chance to spend some time outdoors before dinner.
But with Europe sweltering under its fifth heat wave of the summer, very few customers are showing up. People now prefer air-conditioned outdoor spaces, reducing revenue for many hospitality businesses.
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The problem isn’t just the drop in revenue: the losses caused by extreme heat are typically not covered by business interruption insurance, a situation that highlights an ever-widening gap in insurance coverage in Europe, according to Reuters.
According to estimates by Moody’s, last summer’s heat waves cost Europe 43 billion euros in lost economic output, while insurance payouts totaled just 500 million euros.
In Padua, aperitivo now starts later, “which means that outdoor spaces, terraces, and outdoor areas … remain unused and empty,” said Federica Lunni, president of the hospitality business association APPE Padova.
In a survey covering approximately 600 businesses in the city and its province, more than 80% reported a drop in revenue of about 20% during the recent heat wave.
“A 20% drop wipes out the profit margin,” said Lunni.
Heat waves are placing an increasingly heavy burden on the European economy, as they reduce productivity, curb consumer spending, and drive up operating costs. For insurance companies, such losses are difficult to cover, as they are often due to indirect operational disruptions rather than physical damage.
“Heat alone is not traditionally an insurable risk,” said Swenia Surminski, managing director for climate and sustainability at Marsh.
“Extreme heat rarely causes catastrophic property damage, as is the case with a flood or a storm, but the economic and operational disruption it causes can be just as severe,” she said.
A 2023 survey conducted on behalf of the European Insurance and Occupational Pensions Authority among 9,000 small and medium-sized enterprises found that 28% had business interruption coverage, while only 17% had coverage for business interruption without property damage, which covers events such as strikes.
The gap in insurance coverage is widening as the economic cost of extreme heat increases. Trains are delayed, agricultural yields are declining, and the cost of cooling factories is rising, while employees often struggle to maintain their productivity during prolonged heat waves.
Among the companies that reported impacts from the heat wave, or warned of its potential future impacts when announcing their second-quarter results, were the Swedish retail equipment company ITAB Group, the Italian cement manufacturer Buzzi, and the French payment company Worldline.
Risk Multiplier
Heat often acts as a compound risk, as it interacts with drought, wildfires, and water scarcity, rather than causing a single, clearly definable damaging event. This makes modeling and insuring against it more difficult compared to other natural disasters.
The challenge is particularly acute in Europe, the fastest-warming continent. The Reuters Climate Observatory showed that the average temperature in Western Europe on August 11 was nearly 10 degrees Celsius higher than the average for the period 1961–1990.
Data compiled by the environmental reporting platform CDP shows that 35% of the companies monitored identified heat waves as a risk factor, with companies in the manufacturing, services, infrastructure, and food sectors at the forefront.
Even in cases where insurance covers property damage linked to events such as power outages, businesses often complain that the compensation does not make up for the losses in customer traffic and sales.
“The real loss is the revenue you don’t collect and the business activity that never takes place because of the outage,” said Looney.
To bridge the gap, insurance companies are increasingly turning to “parametric” insurance products, which automatically pay out when temperatures exceed predetermined thresholds. Unlike traditional insurance, which is based on compensation for actual losses, these policies do not require a time-consuming process of assessing and settling claims.
The European parametric insurance market is expected to reach $7.93 billion by 2031, according to a report by KBV Research, with a compound annual growth rate of 9.5% between 2025 and 2032.
Insurance products of this kind are already used in the agricultural sector, where heat can reduce crop yields or livestock productivity, while industry experts see room for expansion in sectors such as transportation and workforce protection.
“Parametric insurance can indeed play an important role,” said Aidan Kerr, head of Swiss Re’s public sector practice in the United Kingdom and Ireland.
However, many companies will first need to focus on climate adaptation of their operations—for example, investing in cooling technologies, redesigning workspaces, and testing the resilience of supply chains,” said Surminski of Marsh.
“Take action to prevent losses, rather than trying to deal with them after the fact,” she recommended.
Source: in.gr
