The European Stability Mechanism and the European Insurance and Occupational Pensions Authority have proposed a shared EU disaster insurance backstop, arguing that a European-level pool for natural catastrophe risks could cut the insurance protection gap and give insurers more capacity to absorb losses from floods, storms, wildfires and earthquakes. In a joint discussion paper published on Thursday 9 April 2026, the institutions concluded that the required capacity of the backstop would range from €10bn to €65bn, depending on the risk covered and climate dynamics.

The proposal comes as Europe faces mounting losses from extreme weather and geophysical events. Between 1981 and 2024, natural catastrophes caused more than €900bn in direct economic losses across the EU, with one-fifth of that total recorded in the last few years of the period. Insurance coverage, however, remains patchy, leaving households, businesses and governments exposed.

ESM and Eiopa estimated that the insurance protection gap at European level stands at 75% using historical loss data and about 50% under a modelling approach focused on property risks. The gap is wider in some countries and for some perils, with Italy, Greece, Bulgaria, Portugal, Slovenia and Romania among the countries with the largest shortfalls, while France, Spain and Belgium have the smallest gaps, with less than 20% of losses uninsured.

Pooling risk across Europe

The core argument of the proposal is that pooling risks across countries and perils would allow insurers to diversify exposures more efficiently than under stand-alone national systems. Model simulations showed that pooling risks across EU member states and perils could reduce overall capital needed to back aggregated risk by up to 67% compared with separate national solutions, according to the report.

Using catastrophe models across 21 countries, the paper found that internal pooling of perils within each country reduced gross risk by about 22%. When all countries then pooled risks together and benefited from geographical diversification, risk fell by a further 45%, leaving net pooled risk about 67% below the initial gross risk.

The institutions argued that this greater capital efficiency could enable insurers to underwrite more business without raising their capital base, while also helping reduce the cost burden on policyholders. Even pool members not directly exposed to a specific peril would benefit from the inclusion of uncorrelated risks, because broader diversification reduces volatility and improves stability, ESM and Eiopa reasoned.

As an illustrative design, the paper set out a structure that could cut the European protection gap for property risks to around 10%, from about 50% under the modelled status quo. ESM and Eiopa argued that bringing the protection gap below 10% would strike a balance between economic efficiency, affordability and resilience in mature insurance markets. They also noted that the modelling does not capture all lines of business, because it includes property and motor losses but excludes infrastructure and agricultural losses, meaning the overall protection gap would still be larger.

Backstop sized at €10bn to €65bn

The proposed loan-based backstop would provide funding when losses exceeded the pool’s available resources. The institutions suggested that such a facility should have a very high credit rating and be able to raise funds on capital markets at favourable rates, passing those terms on to pool members while preserving fiscal neutrality over the medium term. Any loans would need to be fully repaid by the pool’s members, including associated costs, the paper emphasised.

In the simulations, the pool was assumed to start with a cash position of €10bn, potentially provided by the backstop facility in the form of a long-term interest-only loan. On that basis, the required lending capacity of the backstop varied from less than €10bn for more frequent severe disasters to as much as €65bn for very extreme scenarios with a 0.1% probability. Those figures are additional to the initial €10bn funding for the pool, according to the report.

The paper also concluded that the pool would be likely to accumulate reserves over time in most scenarios, reducing the probability that the backstop would be called. In 90% of simulated cases, the pool built up reserves over time, while only in the worst 1% of scenarios did it fail to do so, the modelling showed.

Lower volatility and funding costs

For insurers, the appeal of the combined mechanism lies not only in diversification but also in lower earnings volatility and more predictable funding. ESM and Eiopa found that the pool and backstop together could reduce cash flow volatility for pool members by 19.9% compared with an unpooled scenario over the first two years. On average, in years when the backstop was triggered, net present costs were reduced by about 18%, assuming a natural catastrophe cost of capital of 10% and a risk-free rate of 2.5%.

The institutions argued that lower refinancing costs should translate into cheaper cover for policyholders and greater willingness among insurers to write higher-risk business. The backstop, they noted, would act as a reinsurer of last resort for extreme tail events and reduce reliance on ad hoc government intervention after disasters.

Climate pressure and uneven coverage

The paper also highlighted the scale of the challenge facing Europe’s insurance market. It cited illustrative recent disasters including the 2012 earthquake in Italy, which caused about €20.5bn in economic losses and about €2bn in insured losses, the 2021 Ahr valley floods in Germany and adjacent countries, which caused about €51bn in economic losses and €13bn in insured losses, the 2024 flooding in Valencia with about €11bn in economic losses and €4.5bn insured, and the 2024 Central Europe floods with about €9bn in economic losses and €4bn insured.

The report also underlined that Europe is the fastest-warming continent and warned that climate-related catastrophes are increasing in frequency and severity. That means losses which are now treated as once-in-a-century events may occur more often, potentially requiring the size of both the pool and the backstop to increase over time. Inflation, urbanisation, wealth accumulation and growing exposure in risk zones are also adding to insured losses, the paper concluded.

A framework, not a final policy blueprint

ESM and Eiopa stopped short of presenting the scheme as a final policy recommendation. Instead, they framed the paper as a technical contribution to the debate on a European risk-sharing mechanism, building on earlier work by Eiopa, the European Central Bank and the ESM. The paper noted that several design choices remain open, including the trigger event, coverage limits, interaction with national schemes and the integration of capital market tools such as catastrophe bonds.

The report also stressed that a shared insurance backstop would need to sit within a broader disaster risk strategy. That would include measures to improve insurance take-up, address affordability, encourage risk reduction and strengthen adaptation through infrastructure, zoning and building standards. Without tackling demand-side weaknesses as well as supply-side capacity, the protection gap would remain difficult to close, the report claimed.

Even so, the institutions made a clear case that a shared European mechanism could strengthen private sector participation rather than replace it. By combining risk-based pooling with a loan-based public backstop, they concluded that Europe could create a more stable framework for covering natural catastrophe losses while limiting the burden on taxpayers.