ECB and EIOPA propose European approach to reduce economic impact of natural catastrophes

  • ECB and EIOPA propose possible EU-level approach to reduce insurance protection gap for natural catastrophes, building on existing national and EU structures
  • Two-pillar solution includes pooling private risks to increase insurance coverage and strengthening EU public disaster risk management

Published on the 18th of December 2024

The European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) today released a joint paper with a proposal designed to reduce the economic impact of natural catastrophes in the EU. The paper builds on the policy options presented in a 2023 joint ECB-EIOPA discussion paper which advocated a ladder approach to natural catastrophe insurance involving both the private and public sectors.

This proposal is a response to the growing frequency and severity of natural catastrophes linked to climate change and the rising economic losses they entail. The proposal seeks to protect people, businesses and governments from these losses, thereby also mitigating the associated macroeconomic and financial stability risks in the EU. It does so by incentivising risk mitigation and adaptation and clarifying the division of responsibilities between the private and public sectors.

Building on existing national and EU structures, the ECB and EIOPA propose a possible EU-level solution composed of two complementary pillars:

  • An EU public-private reinsurance scheme to increase the insurance coverage for natural catastrophe risk. By pooling private risks and perils across the EU, this scheme would exploit economies of scale and diversify the coverage of high risks at the European level. It would be funded by risk-based premiums from (re)insurers or national insurance schemes.
     
  • An EU fund for public disaster financing to reinforce public disaster risk management in Member States. Financed by contributions from Member States, this fund would help rebuild public infrastructure following natural disasters, subject to Member States having implemented agreed risk mitigation measures prior to the event to minimise moral hazard.

As natural catastrophes become more frequent and more severe, insurance is expected to become
less affordable and the already sizeable insurance protection gap is likely to widen further. At the
same time, the paper shows that national public-private insurance schemes are helping to reduce the
insurance protection gap in several countries. It examines how these schemes make use of private
and public funds to do so.

Updated on the 18th of December 2024