The European Union Solidarity Fund: an assessment of its recent reforms

Abstract

After extensive flooding in 2002, the European Union Solidarity Fund (EUSF) was created as an ex post loss-financing vehicle for EU member states and candidate countries in the case of disasters that exceed the government's resources to cope. The EUSF is viewed as a valuable instrument for pooling risk among countries in Europe and potentially as a model for financing loss and damage from climate change in vulnerable countries worldwide. This paper assesses its future prospects taking account of reforms adopted in 2014. Our analysis is based on three recognized aims of the Solidarity Fund: its promotion of solidarity with those countries having the least capacity to cope with major disasters; its contribution to proactive disaster risk reduction and management (climate adaptation); and its robustness with regard to its risk of depletion (stress testing). Using a simulation approach for future disasters, we conclude that the reformed EUSF's risk of depletion, although it is reasonably robust to more frequent disasters, could be reduced by increasing member state contributions and/or engaging in risk transfer. The European Commission has taken important steps in linking the fund to proactive risk reduction; yet, by changing its budgeting practices, the commission could be more proactive in encouraging risk management in member states. In its current form, the EUSF does not embed needs-based solidarity. Lower-income Bnew^member states have received disproportionately less compensation in terms of eligible losses, although on average, they have received more disaster aid than what they contribute to the fund. Solidarity could be enhanced by changing the rules for disbursing aid. After briefly describing alternative riskpooling models in the Caribbean, Africa, and Europe, we suggest how design features of the EUSF as compared to other regional risk pools can inform discussions on the Warsaw International Loss and Damage Mechanism.Mitig Adapt Strateg Glob Change

Behavioral motivations for self-insurance under different disaster risk insurance schemes

“…Using premium discounts is likely to be a more effective way for insurers to stimulate policyholders to reduce natural disaster risk in general and flood risk in particular. These results support the ongoing debates and reforms aimed at linking flood insurance coverage with risk reduction in the European Union (Surminski et al, 2015;Hochrainer-Stigler et al, 2017) and the United States (Tullos, 2018).…”

Loss and damage from climate change and implicit assumptions of sustainable development

“…Managing financial vulnerability leads to the use of economic risk management tools (Mechler and Schinko 2016;Schinko and Mechler 2017), including various forms of insurance, disaster bonds, and disaster hedging (Burkett 2014;Wirtz et al 2014;Broberg 2019;Nordlander et al 2019). These tools facilitate the management of financial risks to reduce loss of capital (Hochrainer-Stigler et al 2017). They also facilitate capital investment and substitution postdisaster (Lyster 2015;Hochrainer-Stigler et al 2017;Kehinde 2014;Emmerling 2018;Mayer 2014), even in situations where avoiding L&D may not "comply with cost-benefit principle" (Ma et al 2015;Sharma 2017).…”

“…These tools facilitate the management of financial risks to reduce loss of capital (Hochrainer-Stigler et al 2017). They also facilitate capital investment and substitution postdisaster (Lyster 2015;Hochrainer-Stigler et al 2017;Kehinde 2014;Emmerling 2018;Mayer 2014), even in situations where avoiding L&D may not "comply with cost-benefit principle" (Ma et al 2015;Sharma 2017). The private sector sees these as posing "business opportunities" in the areas of "insurance, modelling, reconstruction" (Surminski and Eldridge 2015).…”

Integrating Systemic Risk and Risk Analysis Using Copulas

“…For example, based on the findings in Jongman et al (2014) and Timonina et al (2015), new stress tests for flood financing instruments could be performed. This revealed a high susceptibility of one core financing instrument, the European Union Solidarity Fund, which faces a significant risk of depletion following extreme flood events (Hochrainer-Stigler et al 2017).…”