EU public-private reinsurance scheme would play ‘active role’ in narrowing protection gap: Morningstar

Mario De Cicco, Vice President of Global Insurance & Pension Ratings, and Marcos Alvarez, Managing Director of Global Financial Institution Ratings at Morningstar, a provider of independent investment research and financial data, explore the growing insurance protection gap in Europe caused by climate-driven natural catastrophes.

Drawing on insights from the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB), they discuss the potential benefits of an EU-level insurance scheme to reduce the gap and strengthen financial stability in the face of increasingly severe disasters.

The need for a coordinated, EU-wide approach to insurance is pressing, especially as national systems struggle to keep pace with the rising financial risks posed by natural catastrophes.

The proposed EU public-private reinsurance scheme seeks to enhance risk diversification, improve affordability, and strengthen financial stability across Europe.

As De Cicco and Alvarez note, “The EU public-private reinsurance scheme would play an active role in reducing the
insurance gap while at the same time ensuring affordable insurance protection against natural catastrophes across Europe.” By expanding the reach of risk-pooling, this system could provide crucial support for both governments and private insurers.

Despite the growing threat of climate-related events such as floods, wildfires, and storms, the current state of insurance coverage in the EU is inadequate. According to EIOPA’s 2024 dashboard, only 20% of the economic losses generated by natural catastrophes in the EU are insured, leaving the remaining 80% exposed.

The authors point out that “seven out of 28 countries reported uninsured economic losses from natural catastrophes above 95% of the total.” This significant insurance gap is expected to worsen as natural disasters grow more frequent and severe, putting increasing pressure on public and private financial systems.

The problem is compounded by the climate crisis, which drives both the increasing severity of natural events and the rising costs associated with insuring against these risks. This scenario exacerbates affordability challenges for consumers, businesses, and governments alike, making it clear that a larger, more resilient system is necessary.

Several European countries have already implemented national insurance schemes to address the financial risks posed by natural catastrophes. Denmark, France, and Belgium have particularly effective schemes that combine public and private sector resources to manage risks.

For instance, in Spain, the Consorcio de Compensación de Seguros (CCS) has been essential in covering claims for extraordinary risks such as floods, helping to mitigate the financial impact of catastrophic events on both the public and private sectors.

However, national insurance systems have their limitations, particularly in their ability to cover all natural catastrophe risks comprehensively.

As noted by the authors, Italy’s new scheme (set to launch in 2025) will focus solely on certain natural events and will exclude individuals and residential homes. These limitations underscore the need for a more comprehensive EU-wide solution that can pool risk across multiple countries, providing a larger, more stable financial mechanism to address the growing catastrophe risks.

The proposed EU-level public-private reinsurance scheme, as outlined by EIOPA and ECB, would offer substantial benefits. De Cicco and Alvarez highlight that an EU-level solution would create more effective risk management frameworks and enhanced risk diversification, strengthening the continent’s ability to withstand the financial impact of natural disasters.

As they explain, “A EU-level solution leveraging upon the existing insurance schemes and enhancing the diversification effect of risk-pooling on a broader scale with the aim of supporting financial stability.”

This broader EU-wide approach would also incorporate additional risk transfer mechanisms such as catastrophe bonds, further strengthening Europe’s ability to handle the financial fallout of increasingly frequent natural catastrophes.

The authors note that this would provide the added benefit of improving the affordability of insurance by spreading risk over a larger pool of countries.

Moreover, the private sector would benefit significantly from this expansion. The proposal would provide additional reinsurance capacity, helping insurance companies absorb some of the financial risks associated with natural disasters. This, in turn, would help improve the availability and affordability of insurance, particularly in high-risk regions.

While the primary benefits of the EU-level solution are financial, the broader impact of such a scheme would be social as well. By ensuring that vulnerable populations have access to affordable insurance protection, an EU-level scheme would reduce the social and economic impacts of natural catastrophes.

For example, regions that might otherwise be unable to obtain coverage due to high premiums would be protected, creating a more equitable system for all European citizens.

National insurance schemes have made strides in mitigating the financial fallout from natural disasters in certain countries, but the authors argue that EU-wide action is essential to address the growing threat of natural catastrophes across the continent. The EU-level solution proposed by EIOPA and ECB offers a promising path forward by expanding risk pooling, improving affordability, and supporting financial stability.

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