If they want the refund, they have to ship the 
damaged item back to you (I think under 
international shipments, the shipper needs to 
file the insurance claim so thus they need the 
item in question; check with EMS to make sure).  
The EMS insurance was meant to protect you and 
the buyer; there's no reason why it shouldn't be 
used.

Then you could just file the claim, get the 
money, and refund the buyer whatever is 
appropriate.  Subtract your costs of shipping 
from the refund, if you like.  Whether or not it 
was the exact same item you sent to them, at 
least you can wash your hands of the entire mess 
afterwards.

Before you do that, you can also ask the buyer 
if they want to claim buyer protection with 
PayPal or their credit card company instead.  I 
don't think those companies could do anything to 
your PayPal accout or credit rating.  You can 
let the buyer know that EMS insurance may take a 
very long time to claim, so this may be a faster 
option if they want their money sooner.

But under no circumstances should you ever take 
money out of your own pocket for this nonsense.  
You already protected yourself so there's no 
reason to burden yourself any more than 
necessary.