Europe is facing a rapidly intensifying natural catastrophe challenge. Climate change has increased both the frequency and severity of floods, storms, heatwaves, wildfires and earthquakes, generating significant economic losses and putting growing strain on households, businesses and public finances. Yet insurance coverage across Europe remains limited. The result is a substantial “protection gap” between total economic losses and insured losses, leaving much of the financial burden to be absorbed ex post by governments and affected communities.
A joint discussion paper by the European Stability Mechanism (ESM) and the European Insurance and Occupational Pensions Authority (EIOPA) (the “Paper”) explores how a European-level risk sharing mechanism could help close this gap. The Paper demonstrates that pooling natural catastrophe risks across countries and perils, combined with a loan based public backstop, could materially enhance insurance capacity, reduce volatility, and lower
