Natural catastrophes: ECB and EIOPA propose approach to reduce economic impact

• 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

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.

“Recent events in Europe have shown the challenges the EU and its Member States are facing in dealing with natural catastrophes,” said EIOPA Chairperson Petra Hielkema. “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 added.

ECB Vice-President Luis de Guindos said: “We need to get prepared for the 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.”

Source – ECB 

Extreme weather and climate events can have significant macroeconomic implications. They can also affect financial stability and weaken the financial position of governments that often step in to provide relief or cover losses in the aftermath of a catastrophe. While the effects of such events can be mitigated by catastrophe insurance, only about a quarter of climate-related catastrophe losses are currently insured in the EU. In some countries, the figure is less than 5% (see chart). Moreover, this climate insurance protection gap is expected to widen further owing to the increasing risk posed by climate change.

Chart: The share of insured economic losses related to natural catastrophes in Europe is low and could decline in the medium to long term

The European Central Bank (ECB) and the European Insurance and Occupational Pensions Authority (EIOPA) have worked together on how to enhance the insurance of European households and companies against climate-related catastrophes such as floods and wildfires. This work resulted in two papers aimed at fostering debate on how to tackle the climate insurance protection gap.

Our joint discussion paper published in April 2023 provided evidence of the economic significance of this gap and advocated a ladder approach to natural catastrophe insurance to help reduce it. This multi-layered approach suggested to involve both the private and public sectors at national and EU-level. The paper received feedback from various stakeholders which motivated further work.

A follow-up paper published in December 2024 proposed a possible EU-level solution to address the gap. Building on existing national and EU structures, the proposed solution would rest on two complementary pillars:

• an EU public-private reinsurance scheme to increase insurance for natural catastrophes by pooling private risks
• an EU fund for public disaster financing to reinforce public disaster risk management in Member States

The complementarity of the two pillars would ensure the efficient use of private and public sector funds for natural disaster payouts and encourage ex ante risk mitigation. The two -pillar system further develops the ladder approach, particularly its top layer, while fostering and safeguarding solutions at the national level, providing incentives for preventive measures and reducing moral hazard.

The 2023 and 2024 joint ECB-EIOPA papers are part of the ECB’s climate agenda and its work on improving the overall understanding of climate-related risk. The policy options presented should be complementary to ambitious mitigation policies aimed at tackling climate change and reducing associated catastrophe risks.

Source – ECB