Extreme weather events such as storms, heatwaves, and floods have caused economic damage of approximately 500 billion EUR in Europe over the past 40 years. Given that the highest damages occurred in the last decade, a continuation of this negative trend in the future can be expected. Insurance plays a significant role in mitigating the economic consequences of natural disasters, which is particularly crucial for Slovenia, as it ranks among the countries with the highest economic losses per capita. According to the European Environment Agency (EEA), less than a third of all losses in Europe are insured, posing a risk, especially for the most vulnerable population. Consequently, this study focuses on investigating the insurance gap in protection against natural disasters, defined as the proportion of uninsured economic losses out of total losses resulting from a catastrophic event. The study’s objective is multifaceted: first, it analyses the trend in expenditures for residential property insurance in recent years; second, it economically evaluates the insurance gap in residential property insurance, stemming from the affordability issues of such insurance and other factors such as lack of awareness and strategic behaviour of individuals; and third, in the context of assessing the insurance gap due to the affordability issues of flood and earthquake insurance, the necessary level of subsidies upon the introduction of mandatory insurance for various scenarios is evaluated.
The analysis of expenditures for residential property insurance, their economic accessibility, and the assessment of the insurance gap in Slovenia were conducted using microdata, i.e., household data obtained from the Household Budget Survey (HBS) for the years 2015, 2018, and 2022. The survey indicates that households allocated on average 224 EUR for real estate insurance and 28 EUR for insurance of movables in 2022. Expectedly, expenditures for residential property insurance are higher among wealthier households. The analysis reveals the vulnerable position of households in the lowest income class, as well as the potential exacerbation of inequality. Equivalent expenditures for home insurance in equivalent incomes in the second-, third-, fourth-, and fifth-income quintile classes decreased from 2015 to 2022, while they increased in the first income quintile. In 2015, expenditures for residential property insurance in the poorest households amounted to 1.5% of their income, while in 2022, it reached 1.8% of their income.
The estimation of the insurance gap was twofold. In the first approach, the proportion of uninsured residential units was identified. The data indicates that the insurance gap for flood insurance, measured as the proportion of uninsured residential units, is 77%, while for earthquake insurance, it is 82%. It is essential to emphasize that only the three largest insurance companies in Slovenia were included in the calculation, and a household may own multiple properties, hence this estimate of the insurance gap is somewhat inflated. In the second approach, the proportion of households who do not have their properties insured and thus have no expenditures for residential property insurance was identified. The share of such households decreased from just over 25% in 2015 to slightly below 20% in 2022. It is estimated that the insurance gap for flood insurance, measured as the proportion of uninsured households, is 60%, and for earthquake insurance, it is over 70%.
Factors influencing the size of the insurance gap can be divided into three groups: (a) insurance is not available in the market (lack of supply), (b) insurance is financially inaccessible, and (c) policyholders are unaware of the risks they face or behave strategically (speculate). Calculations show that we have 25,411 households without insurance below the poverty line, or 27,270 households who would be below the poverty line after paying the premium. For them, it can be stated that the reason for being uninsured lies in the financial inaccessibility of insurance. If we extend this group of the poorest to 40% of households with the lowest incomes who do not have their properties insured, it constitutes 77,225 households. For 37,311 uninsured households from the third and fourth quintile classes, we can assume that financial inaccessibility of insurance is not such a significant issue; the more likely reason lies in the lack of awareness of the risks of natural disasters they face and their insufficient awareness of this issue. Among the wealthiest 20% of households, it is estimated that 14,131 are uninsured. For these households, besides being unaware of the risk, strategic behaviour could be a reason for being uninsured.
To determine the extent of subsidies needed to protect the most vulnerable, in case of introducing mandatory flood and earthquake insurance, three scenarios of beneficiaries based on household income were developed: (1) Threshold scenario, where all households living below the poverty line are eligible for subsidies, (2) Regressive scenario, where households in the first and second income quintiles are eligible for subsidies in decreasing proportions (80% fist quintile, 20% second quintile), and (3) Threshold+ scenario, where all households for whom the premium would exceed the difference between available income and the poverty risk threshold are eligible for subsidies. According to the Threshold scenario (the narrowest circle of beneficiaries), an annual subsidy of 21.1 million EUR would be needed, according to the Threshold+ (EIOPA) scenario 22.6 million EUR, and according to the Regressive scenario with the widest circle of beneficiaries 33.3 million EUR.
As the introduction of mandatory insurance significantly increases the volume of insurance, it can be expected that economies of scale will operate on the cost side of insurers. Thus, the necessary subsidies under the Threshold+ scenario could be reduced from 22.6 million EUR to 20.3 million EUR (in case of a 10% reduction in premiums), 18 million EUR (in case of a 20% reduction in premiums), and 15.8 million EUR (in case of a 30% reduction in premiums).