In recent years, Europe has been experiencing the effects of climate change with increasing frequency and severity – extreme weather events such as floods, fires, hurricanes and landslides are becoming an everyday occurrence rather than the exception. As a result, the question becomes increasingly important: are our homes and property adequately protected against natural disasters? On the surface, the answer seems simple – after all, it’s enough to buy adequate insurance. However, a recent report by the European Insurance and Occupational Pensions Authority (EIOPA) shows that many consumers live in the mistaken belief that their policy protects them from the effects of natural disasters, while the reality may be quite different. This phenomenon, known as the “insurance illusion,” can have dramatic financial and psychological consequences when nature shows its destructive face.
When documents confuse more than they clarify – sources of “insurance illusion”
One of the key reasons for this illusion is the way information about coverage is presented to customers. EIOPA examined insurance product information documents (IPIDs) and general policy conditions in eight European Union countries. The results are disturbing – many documents contained vague, generic language, imprecise definitions and difficult, technical language that effectively made it difficult for consumers to understand what they were actually protected against. In some cases, IPID suggested protection against flooding, but upon closer inspection of the terms and conditions, it turned out that all floods caused by precipitation – and thus the most common ones – were excluded. Other documents did not explicitly indicate that insurance against natural disaster risks was optional, which could lead to the mistaken impression that such risks were covered by basic protection.
Not every lack of insurance is a conscious decision – a demand problem
Many consumers do not purchase disaster insurance, although they have access to it. EIOPA stresses that the reason is not always lack of interest or frugality. Often the problem is demand factors: lack of knowledge, distrust of financial institutions, low risk awareness and, crucially, difficulty in understanding offers and contract terms. Consumers do not want to buy a product whose operation they do not understand, and the current form of many documents not only does not help, but even discourages them from making a decision. Meanwhile, the availability of clear and reliable information could significantly increase the level of insurance in society, while strengthening its resilience to the effects of natural disasters.
Transparency pays off – good practices that build trust
However, not everything is painted in black colors. EIOPA has also identified a number of examples of good practice that can serve as a model for the entire market. The best IPIDs are documents that are clear, concise yet comprehensive. Insurers that clearly distinguish between basic coverage and additional options, clearly indicate all exclusions and use understandable language contribute to building an informed market. Particularly well-regarded were documents that included specific examples, graphic labels and a simple classification of risks. Such an approach not only allows the customer to better understand what they are buying, but also builds trust in financial institutions – trust that has been badly damaged in recent years.
Major pain points – where the market continues to fail
Unfortunately, despite positive examples, many aspects need urgent improvement. Among the most common mistakes are:
- overly general or inconsistent definitions of contingencies (e.g., “driving rain” or “hurricane winds” without specifying the intensity threshold),
- lack of information about geographic or time limitations (e.g., insurance only works once every five years, but this information is hidden in the appendix),
- the use of specialized, incomprehensible vocabulary and reference to other documents that the consumer must find and analyze on his own.
Such practices not only undermine trust, but also make it significantly more difficult to compare offers and make informed purchasing decisions.
Clear information is not a privilege – it’s an obligation
EIOPA chairwoman Petra Hielkema stated bluntly that illegible information documents can lead to serious consequences – from customer disappointment to actual financial losses. When disaster strikes and the consumer only then learns that his or her policy is not working, the consequences can be dramatic. That’s why EIOPA calls for documents such as IPIDs to be not just a formality, but a viable information tool. Ideally, they should also include visual elements (tables, pictograms) that quickly and clearly communicate key information. This not only increases readability, but also realistically supports consumer decisions.
Social resilience begins with knowledge and understanding
Disaster insurance is not just a matter of individual asset protection. It’s also part of a broader strategy to build social resilience against the effects of climate change. The more households have real protection, inconspicuous only on paper, the less pressure on state aid systems and the less risk of the effects of a disaster spilling over into the economy as a whole. This is why it is so important that consumers not only have access to the right products, but also know what they are really buying.
What’s next? Directions for change and commitments from regulators
The EIOPA report is not only a diagnosis, but also an impetus for action. The Authority announces that it will continue to monitor the market and promote positive examples. On the one hand, recommendations for insurers are planned, on the other – educational activities aimed at consumers. The goal is to create a market in which every person – regardless of their level of knowledge or experience – will be able to make an informed decision to buy insurance. Because only then will insurance cease to be an illusion and become a real tool for protection in the face of unpredictable forces of nature.