In an effort to address the growing economic challenges posed by natural catastrophes, the European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) released a joint proposal on December 18, 2024, aimed at mitigating the economic impact of these disasters across the European Union (EU). The proposal builds upon a discussion paper from 2023, which recommended a hybrid approach to natural catastrophe insurance by combining both private and public sector initiatives. This new strategy comes in response to the increasing frequency and intensity of natural disasters, which are largely driven by climate change and their escalating economic repercussions.
The joint proposal outlines a comprehensive plan to shield individuals, businesses, and governments from the economic fallout of natural catastrophes, with a focus on alleviating the financial and macroeconomic risks these events bring. By incentivizing risk reduction and adaptation strategies, the proposal seeks to clarify the responsibilities of both the private and public sectors in tackling these challenges. The ECB and EIOPA aim to enhance the EU’s resilience to climate-related disasters, ensuring greater financial stability across the region.
At the heart of this proposal are two complementary pillars, designed to work together to strengthen the EU’s capacity to handle the increasing risk of natural catastrophes. The first pillar is the introduction of an EU public-private reinsurance scheme. This scheme aims to broaden the insurance coverage available for natural catastrophe risks by pooling private-sector risks across the EU. By doing so, it maximizes economies of scale and enhances the diversification of high-risk coverage at a continental level. The scheme would be funded through risk-based premiums collected from insurers or national insurance schemes, ensuring that the burden is shared effectively across the EU member states.
The second pillar focuses on establishing an EU fund for public disaster financing, which would provide additional support for disaster risk management at the national level. This fund would be financed by contributions from EU member states, helping to rebuild public infrastructure after natural disasters. However, the fund would be contingent on member states implementing agreed-upon risk mitigation measures prior to the occurrence of natural disasters, in order to reduce potential moral hazard and ensure that the fund is used efficiently.
As natural disasters become more frequent and intense, the affordability of insurance is expected to decline, exacerbating the already significant insurance protection gap. The ECB and EIOPA’s proposal seeks to address this issue by offering a more robust approach to disaster risk management, which not only strengthens financial protection but also reduces the economic strain on governments and individuals. The paper underscores that national public-private insurance schemes are already helping to close the protection gap in some EU countries, and this proposal looks to build on these successful models. These schemes, which combine public and private resources, are proving effective in providing coverage and reducing the financial impact of natural catastrophes.
With the increasing threats posed by climate change, the need for comprehensive and innovative solutions to mitigate the economic impact of natural disasters has never been more urgent. The ECB and EIOPA’s proposal offers a promising blueprint for the future, one that can help safeguard the EU’s economic stability while ensuring that both the public and private sectors play their part in addressing the challenges of a changing climate.