FERMA Backs EU Natural Catastrophe Reinsurance Plan with Key Caveats

The Federation of European Risk Management Associations (FERMA) has endorsed a proposed European public-private reinsurance scheme for natural catastrophes, while identifying several conditions essential for the initiative's effectiveness. The proposal, developed jointly by the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB), aims to create an EU-level system to help close the insurance protection gap for natural catastrophe risks.

Outlined in their joint publication, Towards a European System for Natural Catastrophe Risk Management, the two institutions envision a two-pillar approach centered on a public-private reinsurance pool. The scheme would be funded through risk-based premiums paid by insurers or national systems and is supported by the European Commission's recent European Preparedness Union Strategy.

FERMA endorsed the proposal's risk-based funding model, saying it promotes risk awareness, encourages prevention, and reinforces existing best practices in the insurance market. The organization argued that an EU-wide reinsurance pool could reduce price volatility and allow Europe to regain pricing sovereignty, offering more stable insurance costs for all stakeholders.

FERMA also outlined several areas that require attention for the scheme's success. The group called for harmonized and reliable data collection across EU member states to enable accurate risk assessments and fair pricing. "Regulators must define the data to be collected, standardize methodologies, and establish robust governance systems," the position paper said.

On pricing, FERMA warned that without a broad and diverse pool, premiums could become unaffordable. The organization recommended studies to determine the optimal size for risk diversification and pushed for a framework ensuring significant private sector participation, including a minimum threshold for involvement.

FERMA also underscored the need for a clear and stable regulatory framework to manage claims and obligations while avoiding unnecessary administrative burdens. It cautioned against regulatory designs that could introduce cost inefficiencies.

To support private sector engagement, FERMA highlighted the challenges created by annual renewal cycles and suggested integrating mechanisms to assess returns over multiyear periods. It also advocated for ongoing consultation between policymakers, insurers, and risk managers throughout the initiative's design and implementation.

The group emphasized the importance of a transparent governance structure, calling for clearly defined roles across EU institutions, national schemes, and private entities to avoid market distortion. Additionally, it urged that the scheme include funding for risk prevention and mitigation efforts to enhance long-term resilience.

"FERMA welcomes the proposed EU public-private reinsurance scheme as a vital step in addressing the growing natural catastrophe protection gap. Its success, however, will depend on close collaboration among stakeholders, consistent data practices, and clear legal and operational structures," Charlotte Hedemark, president of FERMA, said.