The European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB) have released a joint paper outlining a proposed framework to mitigate the economic impact of natural catastrophes in the European Union.
This initiative builds on a 2023 discussion paper advocating for a "ladder approach" to natural catastrophe insurance, integrating private and public sector involvement.
The proposal addresses the increasing frequency and severity of natural disasters linked to climate change and the economic losses they cause. It aims to reduce these losses by promoting risk mitigation and adaptation while clarifying the roles of the private and public sectors.
The proposed framework is intended to protect individuals, businesses, and governments, as well as mitigate macroeconomic and financial stability risks within the EU.
The ECB and EIOPA propose a solution comprising two interconnected pillars. The first is an EU public-private reinsurance scheme designed to increase insurance coverage for natural catastrophe risks.
By pooling risks and perils across the EU, the scheme would take advantage of economies of scale and diversify high-risk coverage at the European level. Funding would come from risk-based premiums paid by (re)insurers or national insurance schemes.
The second pillar is an EU fund for public disaster financing. This fund would support public disaster risk management in Member States by helping to rebuild infrastructure after natural disasters. Contributions from Member States would finance the fund, with access contingent on the implementation of agreed-upon risk mitigation measures to minimize moral hazard.
As climate-related disasters increase in frequency and intensity, insurance is expected to become less affordable, potentially widening the existing protection gap. The paper highlights how national public-private insurance schemes in several countries have already helped reduce this gap by combining private and public funding sources.
EIOPA chairperson Petra Hielkema (pictured above) emphasized the urgency of coordinated action, noting that recent events have demonstrated the challenges faced by the EU and Member States in addressing natural catastrophes.
“This calls for coordinated action. The proposals presented are meant to spark a discussion on possible ways to reduce the insurance protection gap through an EU-level solution, while preserving the integrity of national insurance schemes,” she said.
ECB vice-president Luis de Guindos also underscored the need for preparedness against rising climate risks.
“The proposed solution is one possible way to mitigate the macroeconomic and financial stability risks from natural catastrophes, while also reducing moral hazard.”
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