Between ambition and ambiguity: Italy’s new mandatory NatCat Insurance

As climate-related disasters grow in frequency and severity across Europe, regulators are urgently seeking ways to close the widening protection gap - that is, the disparity between economic losses caused by natural catastrophes and the portion of those losses that are insured. This issue has been thrust into the spotlight by EIOPA and the ECB in their 2023 and 2024 reports, which call for structural reforms at the EU level, including the creation of a public-private reinsurance framework and an EU-wide disaster solidarity fund.

While several Member States already operate national risk-sharing mechanisms – typically involving public reinsurance schemes or dedicated catastrophe pools – Italy has now introduced a comprehensive legislative framework that marks a significant shift from a reactive culture of government aid, to one of proactive resilience and risk mutualization through insurance.

A turning point in Italian risk policy

Italy's 2024 Budget Law (Law No. 213 of December 30, 2023) introduced a game-changing requirement: all businesses (including Italian establishments of non-Italian businesses) must now purchase insurance coverage against natural catastrophes. This obligation is further defined by Ministerial Decree No. 18 of January 30, 2025 (“Decree”), which establishes operational rules for both insurers and insureds.

The obligation is bilateral in nature: on one side, businesses are mandated to obtain catastrophe insurance; on the other, insurers operating in the Italian market are required to offer such coverage. 

This marks a paradigm shift from Italy’s traditional reliance on ad hoc post-disaster government assistance, toward a structured framework of ex ante risk mutualization through insurance. A key component of this new system is the public reinsurance support provided by SACE S.p.A., which will cover up to 50% of the indemnities paid by insurers for mandatory natural catastrophe claims, subject to adherence to a specific agreement. 

Insurer obligations and scope

A central question for the insurance industry concerns the scope of the obligation to offer coverage. Unlike motor vehicle liability insurance, Nat/Cat perils do not correspond to a dedicated branch of business under Italian insurance law. Nevertheless, the Decree clarifies that the obligation applies to insurers (including EEA ones) authorized to operate under class of business 8, provided they are underwriting or intend to underwrite the risks specified in the legislation.

While some market associations have unofficially suggested that insurers which were not actively operating in this market may be exempt, this interpretation has not been formally endorsed. In fact, IVASS has taken a broader stance. In its recent commentary during the parliamentary review of Decree-Law No. 39 of March 31, 2025, IVASS stated that all insurers authorized under “class of business 8”, whether supervised domestically or by foreign authorities, are expected to comply. An estimated 580 insurers will fall within scope.

Coverage must explicitly include flood, overflow, inundation, earthquake, and landslide; other climate related catastrophic events (e.g. hurricanes, typhoons, hail) are not included in the scope of the obligatory cover. Insurers may, at their discretion, offer additional coverages – such as business interruption or protection against flash floods – but the purchase of such coverages must remain optional for the policyholder.

Risk appetite and underwriting obligations

Some market participants questioned whether insurers could apply risk-based selection, limiting coverage to preferred customer segments (e.g. only large businesses). However, both the letter and the spirit of the law preclude this. All qualifying businesses - large or small - must be covered upon request. Insurers may not refuse coverage based on perceived risk, nor can they limit their offering to specific business categories.

That said, insurers may underwrite the risk through various mechanisms: directly, through co-insurance (with no mandatory quota), or via consortia, which must be approved and registered by IVASS.

A risk-tolerant approach

While the law imposes an obligation to contract, the Decree introduces a key safeguard for insurers: Article 5 allows them to set ex ante risk tolerance thresholds. These limits must be established based on the company’s risk appetite and solvency profile, with the involvement of the actuarial function, and reviewed at least annually.

Insurers that reach their predefined threshold may suspend further underwriting across the Italian market - but they must immediately notify IVASS (or their home country Authority) and publish the decision on their website. 

As no formal reporting is required, insurers are strongly advised to maintain robust internal documentation justifying their tolerance levels. 

Incentive-based enforcement

Italy’s approach to enforcement is rooted in positive incentives rather than punitive measures. Non-compliant businesses are not fined directly; rather, they are rendered ineligible for public financial assistance, including disaster relief, subsidies, and certain forms of employment support.

This provision is not self-executing. Each ministry must integrate the requirement into their respective eligibility frameworks. 

Conversely, insurers that fail to comply with their obligation to offer coverage may face administrative fines ranging from €100,000 to €500,000.

Premium calculation and risk-based pricing

The Decree requires insurers to price Nat/Cat policies proportionally to risk. Premiums must reflect geographic exposure, asset vulnerability, historical claims and scientifically validated hazard models.

Moreover, insurers must account for any mitigation measures implemented by the insured - whether individually or collectively - and adjust premiums accordingly. This approach is intended not only to foster fair pricing but also to reinforce the preventive function of insurance, encouraging businesses to invest in resilience. The pricing of this new product is however not the easiest exercise, considering that the product is to cover three different risks with a completely different frequency in different parts of the territory (with the North being more exposed to floods and the South more exposed to earthquakes).

What is on the horizon?

The expectation is that Nat/Cat insurance will be subject to further reforms, which should expand obligations to buy insurance to any individual or organization, as well as to other types of natural catastrophes.