A pan-European natural disaster pool could significantly increase insurance penetration for extreme weather events and earthquakes, according to experts. In a joint paper published Thursday by experts from the EU insurance regulator EIOPA and the European Stability Mechanism (ESM), it is argued that a pool solution combined with an additional backstop mechanism could reduce the insurance gap to 10 percent. Historically, the study notes that only a quarter of natural disaster damage to buildings in Europe was covered by insurance. Currently, that figure is estimated at 50 percent, despite an increase in coverage rates driven by climate change.

This gap is a cause for concern for EIOPA, said Carlos Guine, who is responsible for sustainability at the Frankfurt-based authority. Europe is warming faster than the rest of the world due to climate change, leading to more frequent storms and extreme rainfall. However, because different weather events occur with varying frequencies across EU countries, a pan-European pool solution could reduce risk and insurers' capital requirements by up to two-thirds compared to national schemes. In Italy, for instance, earthquakes represent the most significant potential cost, while the Atlantic coast faces storms and Central Europe deals with flooding.

The authors of the study did not, however, account for the fact that many property owners opt out of insurance, either due to cost or an underestimation of risk. In Germany, a political debate has been ongoing for years regarding mandatory insurance for buildings against flooding and heavy rain, as only just over half of owners are currently covered. To date, the state has typically stepped in to assist homeowners following disasters, particularly in high-risk regions where coverage is expensive. In December, the German Insurance Association (GDV) presented a concept in which a collective reinsurance scheme would absorb the bulk of losses, with the state only called upon in extreme cases.

According to the EIOPA and ESM proposal, the pan-European natural disaster pool would require initial capital of approximately 10 billion euros, sourced either from insurers themselves or raised via catastrophe bonds on the capital markets. Insurers would pay a specific percentage of their annual premiums into the pool and, in return, could draw on it in the event of major natural disasters. The authors emphasize that contributions must be risk-based. For extreme catastrophic events that exceed the capacity of the pan-European pool, a backstop would be triggered. According to the concept, this safety net should range between 10 and 65 billion euros. The backstop would be financed through loans from a public institution such as the ESM, which can secure low-cost debt on the capital markets.

(Report by Alexander Huebner. Edited by Ralf Bode. For inquiries, please contact our editorial office at berlin.newsroom@thomsonreuters.com (for politics and economics) or frankfurt.newsroom@thomsonreuters.com (for companies and markets).)