In December 2024, the European Central Bank and the European Insurance and Occupational Pensions Authority published a joint paper on the role of European solutions in reducing the impact of natural catastrophes. The December 2024 joint paper followed on from their joint paper in April 2023 (see my previous article for a summary of that paper).

The new joint paper is driven by the need to address the widening gap in natural catastrophe (NatCat) insurance protection in Europe, particularly in the context of more frequent and severe disasters across the continent, driven by climate change. Where NatCat events occur and losses are not covered by insurance, the consequences are exacerbated – households, businesses and the economy as a whole take longer to recover, banks face heightened credit risks and governments are pressured to step in (potentially placing further strain on a fiscal position already impacted by the disaster).

The authors analysed 12 existing national NatCat insurance schemes, noting that all such schemes aim to enhance societal resilience against disasters. Such schemes usually do so by improving risk awareness and prevention, while increasing insurance capacity through more affordable (re)insurance.

On foot of this analysis, the authors propose a possible EU-level solution composed of two pillars, namely an EU public private partnership reinsurance scheme (EU Re) and an EU fund for public disaster financing. The two pillars are designed to work together and to supplement, rather than supplant, private (re)insurance cover and national insurance schemes. As an EU solution, they would need to preserve the integrity of existing national structures and support the development of national initiatives.

EU Re

The EU Re scheme would pool private risks across the EU and across various NatCat perils, with the aim of diversifying its risks and thereby reducing its capital requirements. An EU reinsurance layer would add to the stability and predictability of costs, which should safeguard competition while preventing the market from passing excess risk to the public sector without due sharing of costs.

Access to the scheme would be voluntary for private EU (re)insurers or national schemes. Protection would be provided on an indemnity basis – while this mechanism is slower than parametric or index-based cover, it would avoid the risk of payouts not being commensurate with the actual financial impact of a disaster. EU Re would also support insurance and public sector initiatives geared towards risk mitigation and adaptation, for example by enhancing modelling of NatCat risks and facilitating data sharing.

The authors argue that EU Re would help capture the broader economic benefits of insurance at EU level, alleviate the burden on national and EU budgets and promote a more coordinated and effective approach to managing NatCat risks across Member States. From an Irish perspective, in light of the recent publication by the Central Bank of Ireland of the Flood Protection Gap Report, it is notable that the joint paper states that smaller Member States might find it difficult to create a national scheme due to limited risk pooling opportunities.

The joint paper also indicates that the EU Re scheme might not require any public financing or support. It would be funded by a combination of charging risk-based premiums and tapping the capital markets by issuing catastrophe bonds (cat bonds) to investors. As well as transferring risk to the capital markets, this would help to develop the cat bond market across Europe, which is currently less developed than in North America and Asia. Pan-European cat bonds covering a more diverse range of perils would be less risky and more transparent than cat bonds currently issued in the EU, thus attracting a wider set of investors.

EU fund for public disaster financing

This fund would sit alongside the EU Re scheme, as even with increased insurance cover, market-based funding would be complemented by public outlay for reconstruction of public infrastructure after a NatCat event. The joint paper acknowledges that while many such assets are difficult to insure on the private market, their reconstruction is critical to economic and social recovery following NatCat events.

In contrast to EU Re, membership of the fund would be mandatory for all EU Member States, with funding contributions based on each state’s NatCat risk profile, implementation of risk-mitigation measures and adoption of measures to ensure adequate levels of private insurance cover. The fund could be tapped by Member States to assist with the reconstruction of large public infrastructure (e.g. roads, rail networks, ports and bridges) following natural disasters. Payouts from the fund would be conditional on the implementation of risk mitigation measures by Member States.

The joint paper and its proposals are to be welcomed as a further step toward closing the climate protection gap across Europe. The proposal for EU Re will likely be watched with interest by the (re)insurance industry.