Broadening the scope of risk sharing through a European backstop for natural catastrophes

Purpose An increased frequency and intensity of climate-related natural catastrophes has created significant challenges for both the private and the public sector. Existing risk-sharing approaches are reaching their efficacy limits, pushing governments to take on an increasing share of the burden as private-sector solutions become less affordable or available. This paper aims to assess whether adding a European, loan-based backstop to the catastrophe risk sharing hierarchy can expand private insurance capacity, ensure post event claims payment, and reduce reliance on ad hoc fiscal support. Design/methodology/approach The authors present a conceptual design of a pan European insurance pool backstopped by a loan financed facility. They specify cost of capital mechanics for the insurance industry and illustrate the approach by comparing net present costs (NPCs) of backstop loans against capital market refinancing. Findings A pan European pool materially increases diversification across hazards and jurisdictions, lowering concentration risk and capital needs and enabling insurers to underwrite more catastrophe risk – thereby narrowing the protection gap. Net present cost analysis shows that backstop loans are typically more capital efficient than raising equity (and often competitive with debt), allowing insurers to fund claims and smooth costs over time while supporting additional business. Research limitations/implications This paper provides an economic rationale for the establishment of a European backstop facility but leaves some details for further research. In particular, three aspects deserve further in-depth elaborations: the regulatory treatment of the insurance pool, the integration of national solutions into a broader European scheme, and the capacity enhancement following the introduction of a European backstop. Practical implications Proof of concept pilots specifying eligibility, triggers, pricing and conditionality can produce evidence for researchers and policymakers, guiding evaluation, calibration and staged roll out of a European backstop model. Social implications Broader availability and affordability of catastrophe cover for households, firms and governments; By strengthening insurance-based disaster risk financing, the proposed European backstop facility contributes to sustainable development by enhancing economic resilience, preserving public fiscal capacity and enabling climate adaptation, thereby supporting the long-term stability and sustainability of affected economies. Originality/value Advances a European level backstop that operates through a common insurance pool, explicitly targeting fiscal neutrality while crowding in private risk bearing.