AM Best has responded to recent proposals from the European Union to establish a public-private natural catastrophe reinsurance scheme, noting that while the initiative could provide meaningful support to the region’s insurance markets, key operational details remain unresolved.
The proposals, developed by the European Central Bank (ECB) and the EU’s insurance authority EIOPA, outline a two-part framework. One component would be an EU-wide reinsurance scheme intended to pool private risks and perils across member states.
This arrangement aims to leverage diversification benefits and economies of scale, with funding sourced through risk-based premiums from reinsurers, insurers, or national insurance schemes.
The second component would involve the creation of a disaster response fund, supported by contributions from EU member states. This fund would be designated for the reconstruction of public infrastructure after major events.
Access to this support would depend on the implementation of pre-disaster mitigation measures by the respective states, in an effort to reduce moral hazard.
Earlier in the year, Fitch Ratings noted in its own report that the proposed public-private reinsurance scheme for climate-related losses in the EU could enhance market stability and insurance availability.
By diversifying risk across the bloc, Fitch says that the EU scheme could help insurers and reinsurers continue providing cover in high-risk areas, where market participation has been declining due to rising climate-related losses.
According to a Swiss Re sigma report, Europe has experienced four flood events with multi-billion-dollar insured losses since 2021, three of which occurred in 2024. These included major flooding in Germany (May/June), Central and Eastern Europe (September), and Valencia, Spain (October).
The total insured losses from these three events were estimated at US$9 billion. The flooding in Valencia was the most expensive flood event globally last year, with Spain’s Consorcio de Compensación de Seguros estimating insured losses at €4.5 billion, the largest such loss in the country’s history.
While the EU and its member states have invested in urban flood defenses, AM Best noted in its report that exposure continues to rise. Factors contributing to this trend include increased economic activity, higher insurance penetration, land development, and climate-related risks.
AM Best also noted that a comprehensive EU-wide catastrophe reinsurance framework could offer benefits such as reducing pricing volatility, strengthening post-event funding availability, supporting risk mitigation, and narrowing the protection gap between economic and insured losses.
However, the agency also emphasized that several critical elements of the proposal remain unsettled. These include whether certain measures will be made mandatory, how premium pricing and limits will be structured, and what level of regulatory oversight will be implemented.
AM Best noted that European markets currently rely on a range of domestic solutions to manage natural catastrophe risk, and any regional initiative would need to align with these systems to ensure broad stakeholder acceptance.
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