The EU Solidarity Fund

1. ADAM Policy Workshop Brussels May 14, 2009 The EU Solidarity Fund Joanne Linnerooth-Bayer, Stefan Hochrainer, Reinhard Mechler

2. “to show practical solidarity with Member States ….. by granting exceptional financial aid (for uninsurable losses) if these were the victims of disasters of such unusual scale that their own capacity to face up to them reached to their limits” (Commission Report 2004, p. 25). Purpose

3. Legitimacy Does the fund meet its stated purpose? Viability Is it capitalized sufficiently? Efficiency Does it send the right signals for preventive measures? Conclusion: No (qualified) on all three counts Alternative: Provide solidarity by supporting insurance instruments Our analysis examines the EUSF in terms of its:

4. The Solidarity Fund is capitalized at €1 billion covers public expenses for restoring public infrastructure, providing services for relief and clean up, and protecting cultural heritage (uninsurable risks?) can be called upon if a disaster exceeds €3 billion or 0.6% of gross national income in exceptional cases, can be mobilized for regional disasters that do not reach this threshold Background

5. In this 6 year period almost all EU countries applied for funds and more than half received assistance Approximately €1.5 billion allocated Covered17 major disasters, 8 regional, and 2 neighboring countries not themselves meeting the threshold Floods (44%), fire (27%), storms (16%) and earthquakes (4%) and 1 oil spill-note no drought Time from application to grant payment has averaged about 13 months Experience 2002-2007

6. Solidarity? W. EuropeE. Europe Ave. aid (€ mill) 73.8 25.3 Aid/eligible expenses (%) 19.2 9.3 Appl. to Dec. (days) 203 302 Legitimacy : Does the Solidarity Fund meet its purpose? Is the Solidarity Fund providing aid for disasters of such unusual scale that they exhaust capacity to cope?

7. Financial coping capacity? Average flood loss to GDP ratios for EU member countries ADAM modelling results

8. Country (financial) coping capacity vs EUSF criterion *Year event Source: IIASA CATSIM model

9. Viability: Can the Solidarity Fund meet demand? Every 10-15 years, payouts expected to exceed Euro 1 billion Note: Assumed that only one major disaster occurs each year.

10. Unconditional post-disaster assistance discourages countries from taking cost-effective risk-reduction measures and putting ex ante financial instruments into place. EfficiencyDoes the fund give the right signals for risk reduction?

11. What are the alternatives?

12. The EUSF acts as an insurance pool for European risks and transfers them to the reinsurance market eg., the Carribean Insurance Pool solidarity through lower premiums for countries unable to pay risk based premium The EUSF provides reinsurance to national/regional insurance programs Solidarity by offering this capital at lower or no cost to vulnerable countries Encourages more participation of private insurers What are the alternatives?

13. Insurance, public aid and private losses

14. Need for managing risk: government disaster liabilities Government liabilities and flood risk in vulnerable European countries

15. Major problem with providing insurance in Europe is systemic risks to insurers and their cost of backup capital Support for insurance has major advantages over post-disaster aid Incentive compatible Solidarity with most vulnerable Why switch from aid to a reinsurance entity?

16. Thank you

17. It is important to keep in mind that on top of flood risks, the EUSF was set up to fund other emergencies. EUSF support has so far not been granted for drought relief, which, however, may become necessary and desirable in the future. Agricultural insurance, just as flood insurance, exists in many forms involving private and public players. Yet, as our research shows uninsured losses can be quite large, necessitating the need for the government to step in with further aid. ADAM work in the Guadiana basin reveals that funding for droughts under the EUSF may become desirable. The Commission has expressed its readiness to examine all requests for EUSF aid following droughts, but will ensure that “the request is not the indirect result of inefficient water management and that appropriate drought management plans are in place“ (EC, 2007c). Moreover, the Commission has been open to assessing whether changes need to be made to the definition of the criteria and eligible operations, so that the EUSF may better respond to drought events (such as lowering the threshold to € 1 billions). Yet, as discussed above, the rationale of funding drought losses is more difficult to establish than for flood losses, given the fact that predominant impacts are on crop yields, which are traded in markets, and price and compensation effects must be considered. Overall, our analysis highlights the fact that it may be worth considering an increase in fund resources or better leveraging of resources (e.g., by reinsuring the pool). [1] By statute, it may fund other emergencies such as oilspills, and has done so in the past.

18. Viability Can the Solidarity Fund meet demand?

19. Calculating (financial) coping capacity IIASA CATSIM

20. Typically little formal catastrophe insurance in Europe: State takes full responsibility, eg., Nd., Denmark Private voluntary cover, but no state assistance, eg UK Selected insurance compulsory, eg Switzerland, Hungary Compulsory state-backed for multi-hazards, eg., France, Norway, Spain Insurance in Europe