The outlook is even more concerning. If global temperatures rise by 2-3C above pre-industrial levels, annual losses could almost double to €17.3bn ($19.95bn).
The costs are also highly uneven. The European Environment Agency estimates that the 2022 drought alone caused economic losses exceeding €50bn ($57.7bn) – roughly one-third of Slovakia's annual GDP.
The impact extends far beyond agriculture. Low river levels disrupt inland shipping, power stations face cooling-water shortages, steelmakers struggle with raw-material deliveries, and cities must invest in new reservoirs and water infrastructure. The economic consequences are likely to become increasingly severe.
A Risk That Is Difficult to Insure
For insurers, drought presents a particularly difficult challenge.
Insurance works best when risks are isolated. Fires, floods or storms affect only part of the insured population at any given time. Drought is different. It develops slowly, can persist for months and affects entire regions simultaneously, making losses both widespread and highly correlated.
According to a joint study by the European Investment Bank and the European Commission, only 20-30% of climate-related agricultural losses in Europe are covered by public, private or mutual insurance schemes. The remainder is ultimately borne by farmers or taxpayers.
Drought also poses a more fundamental challenge. For farmers, the amount of rainfall alone tells only part of the story. What matters is how frequently it rains, how intense the rainfall is and how much moisture the soil can retain. Long-term soil degradation reduces that capacity, meaning even heavy downpours may do little to replenish groundwater before much of the water runs off.
This creates difficulties for index-based drought insurance. Rainfall may exceed the threshold required to rule out compensation, yet crops can still suffer from severe water stress because the soil has failed to retain sufficient moisture.
Insurers are increasingly turning to satellite monitoring and soil-moisture measurements to improve drought modeling. Even so, better technology cannot eliminate the underlying problem: more rainfall does not necessarily mean more water available to crops.
Europe Wants to Share the Risk
The European Commission has responded by proposing a European disaster-risk financing mechanism designed to help manage large-scale natural disasters, including drought. The proposal has not yet been approved.
The system would operate on two levels. The first would be a common insurance pool funded by participating insurers, allowing risks to be shared across countries and across different types of natural disasters. A drought affecting Central Europe, for example, may not coincide with flooding elsewhere, making it easier for insurers collectively to absorb losses.
If claims exceeded the capacity of the pool, a second layer would provide emergency financing through a public credit backstop. This would allow insurers to spread exceptionally large losses over a longer period instead of absorbing them immediately.
The proposal is not simply about supporting insurers. It is an attempt to create a framework capable of managing increasingly frequent and increasingly costly natural disasters whose risks are becoming too large for individual companies to shoulder alone.
Drought affects everyone, not just farmers. The Commission's proposal seeks to spread the financial burden across a broader range of institutions and over a longer period.
Insurance, however, can only determine who pays for drought – it cannot prevent it. It will not bring more rainfall or restore depleted soils. As droughts become more frequent and more costly, finding institutions willing to absorb this growing systemic risk will become increasingly difficult.
