A paper by the European Insurance and Occupational Pensions Authority (EIOPA) and the European Stability Mechanism (ESM) proposes a European-level risk-sharing mechanism comprising a natural catastrophe insurance pool and a loan-based backstop, aimed at enhancing overall risk-bearing capacity and reducing Europe’s significant protection gap.
The rising frequency and severity of natural catastrophes pose substantial economic and societal challenges across Europe. As risks continue to grow, insurance coverage remains insufficient, leaving individuals, businesses, and governments exposed to financial losses.
The ESM and EIOPA discussion paper noted that primary insurers, reinsurers, market-based solutions, and, where available, national schemes should continue to play a key role in spreading natural catastrophe risk. However, their capacity may be insufficient to absorb losses from large-scale disasters, which are becoming more likely in a warmer climate.
ESM and EIOPA outlined how a European-level risk-sharing mechanism could deliver significant diversification benefits and enable more cost-effective funding, crowding in the private sector.
The proposed mechanism consists of a risk-based premium-financed, Europe-wide natural catastrophe insurance pool designed to diversify risks across countries and perils. This would enable insurers to use capital more efficiently, expand coverage, and keep premiums affordable for households and businesses. The pool would benefit participating insurers and member states by diversifying exposure to largely uncorrelated risks, thereby reducing loss volatility.
The risk-sharing mechanism would also include a loan-based backstop for extreme tail events that exceed the pool’s capacity. Designed to be fiscally neutral, it would allow the insurance industry to absorb costs over time without relying on taxpayers’ money. It would provide predictable and affordable funding, reduce reliance on ad hoc public support, and stabilise reinsurance costs—without distorting private markets or weakening fiscal discipline.
“Together with the other layers of the ladder approach, these elements would form a more resilient catastrophe risk management framework, combining strong private markets, a diversified European pool and a robust financial backstop that provides much-needed stability when unexpectedly large events strike. This enhanced framework would strengthen Europe’s ability to absorb shocks and support a sustainable approach for disaster financing,” said ESM and EIOPA.
