Why risk‐based premiums will not close the catastrophe protection gap: Conventional pricing, reinsurance capacity, and public scheme design

Only about one‐fifth to one‐quarter of the economic losses caused by natural catastrophes in the European Union are insured, and the gap is widening as climate‐related losses grow. EIOPA and the ECB have proposed an EU‐level scheme combining a public–private reinsurance pool, funded by risk‐based premiums, with a public disaster fund. This paper asks whether risk‐based pricing at a public layer can close a gap that risk‐based pricing at the private layer has not. The capital‐market‐imperfections account of catastrophe insurance failure presupposes a knowable loss distribution; climate non‐stationarity removes that condition, and catastrophe pricing is better understood as conventional valuation under fundamental uncertainty. A five‐equation model of conventional pricing, with a demand side, makes reinsurance capacity endogenously cyclical and generates a rationing ratchet whose threshold is derived analytically and verified by simulation: prices soften within a few periods of a market break while attachment points and terms do not, and once climate‐driven model revisions recur before risk‐adjusted prices recover, rationing ratchets up and the insured share falls persistently. Simulated coverage is 15 points lower under conventional pricing with drifting losses than under a constant‐load benchmark, and the model reproduces the documented moments of the 2022–2026 cycle. Drawing on the French and Spanish schemes, the paper sets out the design features a workable public layer requires: solidarity pricing, an explicit public tail guarantee, and countercyclical funding.