European financial agencies have proposed a natural catastrophe insurance pool and loan-based backstop in response to mounting losses from extreme weather.

A discussion paper says about 75% of economic losses from European natural catastrophes have been left uninsured, according to historical data, and the proposal would strengthen resilience.

A pool would enable insurers to use capital more efficiently, expand coverage and improve affordability.

It could be financed through risk-based premiums and would benefit insurers and member states by diversifying exposures to largely uncorrelated risks, the paper argues.

The European Insurance and Occupational Pensions Authority and the European Stability Mechanism say their paper is a first attempt at quantifying the benefits of a risk-sharing tool for natural catastrophes on the continent.

“The aim is to show the advantages of a European solution, which complements to the extent possible existing regimes and enables private sector involvement,” it says.

Primary insurers, reinsurers, market-based solutions and, where available, national schemes should continue to play a key role spreading catastrophe risks, but their capacity may not be sufficient as large-scale disasters become more likely in a warmer climate, it warns.

Between 1981 and 2024, natural catastrophes caused more than €900 billion ($1.5 trillion) of direct economic losses in the European Union. Events highlighting the protection gap include a 2012 earthquake in Italy, the 2021 Ahr valley floods in Germany and neighbouring countries, and flooding in Valencia, Spain, and central Europe two years ago.

The proposed arrangements include a loan-based backstop for extreme tail events that exceed pool capacity.

The agencies say the paper stops short of providing full policy recommendations at this stage.

“The goal is to foster informed discussions without unnecessarily narrowing the available policy options.”