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The European Insurance and Occupational Pensions Authority (EIOPA) has been sounding the alarm for several years in relation to a “natural catastrophe insurance protection gap” throughout the EU. This insurance protection gap refers to the difference between the total losses that arise from natural disasters and the amount of those losses that are insured. EIOPA and the European Central Bank (ECB) have noted that between 1981 and 2023, the cost of natural catastrophes in EU member states amounted to €900 billion, with a fifth of those costs attributable to just the latest three years. Meanwhile, only a quarter of the losses was insured, and this share is declining.
We have previously summarised EIOPA’s concerns in relation to the implications of the natural catastrophe gap (see here). In this article, we look at the measures that EIOPA and the ECB have now proposed to address the protection gap in a paper published on 18 December 2024 (the 2024 Paper). In summary, the proposed measures (described further below) involve a two-pillar approach including a public-private EU-wide reinsurance scheme (complementary to existing national insurance schemes in certain member states) and an EU public disaster fund to support the reconstruction of public assets.
Background
EIOPA and the ECB previously addressed this issue in a joint discussion paper published in April 2023 (the 2023 Paper) outlining the economic significance of the protection gap, which included, among other matters, an increase in banks’ exposure to credit risk and a weakening of the fiscal position of EU member states who are left in a position where they must step in to cover uninsured losses.
Following the publication of the 2023 Paper, EIOPA and the ECB received responses from various stakeholders on a potential EU-wide solution to the problem and analysed existing insurance protection schemes as they currently operate in 12 countries. Most of these schemes operate as public indemnity-based reinsurance schemes and involve the contribution from insurers of expertise including modelling capacity and operational support.
Eight out of the 12 schemes include mandatory elements requiring insurers operating in certain business lines, such as the insurance of property risks, to offer protection against natural catastrophe risks. Policyholders, even those who are considered low risk are required to buy products with the mandatory element included, effectively subsidising the insurance of those in high-risk areas. This leads to risk diversification and avoids the scheme being subjected to a concentration risk where only high-risk properties are covered.
Developments since the 2023 Paper
Since the publication of the 2023 Paper, the urgency of the problem has increased and looks set to continue to. A number of significant flooding events occurred throughout the EU between May and November 2023. More recently, there were catastrophic floods in Central and Eastern European countries in September 2024 followed by similarly devastating floods in Spain in the following month.
It is also now clear that the EU Solidarity fund, which was designed to provide financial support to member states in the aftermath of natural disasters, is not sufficient to deal with the problem. €1 billion was released from the fund to cover damage caused by flooding between May and November 2023 but this was only able to cover a small fraction of the losses arising from that flooding, which amounted to €23 billion in total.
The European Commission has been forced to use separate EU cohesion funds to cover the costs of the 2024 flooding in Central and Eastern Europe, but this cannot be a long-term solution as these funds were not intended to cover natural disaster risks and are only available to a subset of member states whose gross national income is significantly below the EU average.
The Proposed Measures
Pillar One – EU public-private reinsurance scheme
The proposed public-private reinsurance scheme (the EU Scheme) is modelled on the helpful features identified in the analysis of the national schemes that was carried out following the 2023 Paper and is aimed at providing an additional layer of reinsurance at EU level.
Existing private (re)insurers would have access to the EU Scheme, as would existing national schemes. The 2024 Paper emphasises that the existence of a national scheme would not be a prerequisite to accessing the EU Scheme but nonetheless encourages member states that have not already established national schemes to do so. The reason for this is that the EU Scheme is intended to complement rather than replace existing private and public solutions.
The EU Scheme would involve the transfer of part of the risks to capital markets via catastrophe bonds and will explore the feasibility of creating a pan-European catastrophe bond. As with national schemes, it is hoped that the EU Scheme would assist in diversification of risks rather than having concentration risk due to certain member states being more prone to natural catastrophes than others.
The 2024 Paper notes that intervention by the EU Scheme should be contingent on risk mitigation measures being put in place by member state governments, e.g. through climate adaptation projects, to reduce exposure in the long run.
Pillar Two – EU public disaster financing
The second pillar described in the 2024 Paper is a new fund for public disaster financing. This is proposed to operate in a similar way to the existing EU Solidarity fund but with a much broader scope to encourage longer-term strategic plan and investment to promote risk prevention and lower the costs of post-disaster expenditure in member states.
Payouts from the fund could be used exclusively to support reconstruction of public assets that are not covered by private insurance and to ensure that reconstruction takes place in a way that supports future resilience against natural catastrophes.
The level of contributions to the new fund that each member state will be structured in such a way that it encourages risk mitigation and should focus on three factors:
Next steps
The 2024 Paper is intended to form the basis of discussions among stakeholders and EIOPA and the ECB invite alternative proposals for ways to close the insurance protection gap. At present, there is no specific timeline in place for when we might see concrete action by the EU to implement the proposals. However, due to the urgency of the problem and EIOPA’s focus on it, we would expect that more concrete proposals will be published shortly for how the proposed new pillars would work in practice.
As we noted in a previous article, the Central Bank of Ireland (CBI) published a report on the flood protection gap in October 2024, which puts the problems identified by EIOPA and the ECB in an Irish context. The report followed comprehensive research by the CBI analysing the flood risk of each address in Ireland down to Eircode level and comparing against the underwriting criteria of each domestic non-life insurer. Notably, it states that about 1 in 20 buildings has limited access to flood cover, which means that insurance will either be refused, or the availability of insurance will be significantly restricted. The report also identified that 54% of this protection gap was concentrated in just five counties – Dublin, Cork, Kildare, Clare and Louth.
This is a key area of focus for the CBI and insurers selling property insurance products should be prepared for continued engagement with the CBI on potential solutions to the problem. Meanwhile, the broader natural catastrophe gap at European level will continue to be a priority for EIOPA and the ECB and, while the timing is uncertain, we should expect concrete action by the EU arising from the recommendations of the 2024 Paper.
For advice or for further information on this topic please contact Niall Guinan, associate, Laura Mulleady, partner, James Grennan, partner, Sinead Lynch, partner or any member of ALG’s Insurance & Reinsurance team.
Date published 10 January 2024
