EIOPA and ESM Propose Natural Catastrophe Insurance Pool with Loan-Based Backstop

The European Insurance and Occupational Pensions Authority (EIOPA) and the European Stability Mechanism (ESM) published today a discussion paper on natural catastrophe risk management . Amid mounting losses from extreme weather events across Europe, the paper builds on previous research to quantify the benefits of a European risk-sharing mechanism—composed of a natural catastrophe insurance pool and a loan-based backstop.

The proposed mechanism aims to reduce Europe’s significant protection gap, which in the past left around 75% of economic losses from natural catastrophes uninsured, and to strengthen the continent’s resilience against increasingly frequent and severe natural disasters like floods, droughts, storms and wildfires.

Primary insurers, reinsurers, market-based solutions, and, where available, national schemes should continue to play a key role in spreading the risk of natural catastrophes. However, their capacity may not be sufficient to absorb losses from large-scale disasters, which are becoming more likely in a warmer climate. The proposed risk management mechanism would consist of two complementary parts:

• a risk-based premium-financed, Europe-wide natural catastrophe insurance pool, and
• a loan-based backstop for extreme tail events that exceed the pool’s capacity. To further strengthen risk-sharing, EIOPA and ESM staff propose establishing a ‘ European natural catastrophe insurance pool ’ to diversify risks across countries and perils. This approach would enable insurers to use capital more efficiently, expand coverage, and keep premiums affordable for households and businesses. The pool would be financed through risk-based premiums and would benefit participating insurers and member states by diversifying exposures to largely uncorrelated risks, thereby reducing loss volatility.

A loan-based backstop would complement this European layer with an additional financial safety net for extreme events that exhaust the pool’s capacity. Designed to be fiscally neutral, it would allow the insurance industry to absorb the costs over time without using taxpayers’ money. It would offer 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.

Go to the Discussion Paper

Notes

The European Stability Mechanism (ESM) provides financial assistance to euro area countries in crisis, acting as a lender of last resort to ensure the financial stability and prosperity of the euro area.

Details

Publication date 9 April 2026
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