ECB proposes establishing European fund for natural disasters

Temperatures rising at an unprecedented pace are disrupting the planet’s climate system and ecosystems. Global warming is leading to more frequent extreme events, such as fires, floods and droughts, which cause damage with a high price tag, according to data from the European Environment Agency (EEA).

EEA data show that climate and weather extremes caused economic losses exceeding €200 billion between 2021 and 2024.

“The negative impacts are reflected in higher insurance costs in subsequent years or higher public debt,” the report states, identifying adverse consequences of natural disasters for GDP, inflation and the credit system.

Governments are often left with no choice but to act as the last safety net, leading to increased public spending and debt. This is according to a recent study by the Network for Greening the Financial System, an international network bringing together central banks and financial regulators.

“Sometimes the private sector bears the main burden; at other times, the damage is reflected in public finances. Ultimately, however, these events are very costly for the affected countries and their surroundings,” Bénassy-Quéré said.

The European Central Bank and EIOPA have proposed addressing the problem by creating a new Europe-wide public-private reinsurance system—essentially insurance for insurers—and a new European fund to finance disasters.

The European Commission is expected to present a package of measures focused on climate resilience and risk management later this year, as reported by Politico.eu.

“Public authorities must continue to provide emergency assistance, but Europe should also develop common financial instruments that strengthen solidarity and enable climate risks to be shared among member states,” said Spanish Socialist MEP César Luena.

“The future European framework for adaptation to climate change should include a European climate reinsurance or risk-sharing mechanism,” Luena added.

In France, climate disasters are covered by a public-private system that makes climate insurance mandatory and shares the risk between insurers and the state.

“The mechanism essentially consists of insurance policies in the most at-risk areas being subsidised through the margin insurers earn from mandatory insurance in lower-risk regions, at a rate set by the state,” explained Langreney, who advised the French government in 2024 on modernising the model.

“It is an established practice that is necessary for other European countries seeking to expand the availability of insurance,” Langreney added.

Insurers are also calling for stronger prevention. Countries should “stop developing and building assets in high-risk areas”, not only in regions threatened by fires but also in floodplains, said Tobias Grimm, chief climate scientist at Munich Re.