PRAC - the Romanian Catastrophe Insurance Scheme

1. PRAC - the Romanian Catastrophe Insurance Scheme Romania is troubled by several natural perils, including earthquake, flood and landslides. To provide cover against these to owners of dwellings, the government is now setting up a compulsory insurance scheme which should commence operations in 2007. The scheme, called ‘PRAC’ after its Romanian initials (Programul Roman de Asigurare la Catastrofe), is built on principles similar to several other national catastrophe insurance schemes, but with special features, including an important role of the insurance industry. Local authorities are strongly involved in ensuring compliance.

2. Earthquakes, Floods and Landslides Affect Romania The earthquakes, which cause nearly all the damage, are centred in one concentrated zone – the Vrancea zone. Floods come both from the Danube river and from smaller rivers and streams. Landslides are a much less significant hazard but damaging locally.

3. The Vrancea Earthquake Zone • Quake risk in Romania is higher than in most European countries. The Vrancea earthquake zone, within which about 95% of the seismic energy is released, causes over 90% of the losses due to earthquakes. • Vrancea lies in the mid-east of the country, about 140 km NNE of Bucharest. • The earthquakes are at what seismologists describe as ‘intermediate’ depth, with the larger events mostly from 75 to 160 km in depth.

4. The Quake in 1977 Caused Damages Worth $2 Billion • While over past centuries large earthquakes have occurred quite frequently, with nine in the past 200 years with a magnitude (Mw) estimated at 7 or over, a lot are deep enough not to cause severe damage. • The most recent major event was in 1977 and caused considerable damage to Bucharest, estimated by the World Bank to amount to USD 2 billion at the time.

5. Romanian Quake Risk Is Higher than in Most European Countries

6. River Basins Map of Romania

7. Floods Come from South • The Danube River has flooded when upstream countries are also affected, with major floods in 2006. • In addition high-intensity rainstorms cause ‘flash floods’ in other smaller rivers or streams. • ‘Dam burst’ is another possible source of flooding, but is a very much less likely source of loss.

8. Annual Floods Damage Is 18m Euro • The largest losses in the past 25 years were reported at EUR 171 million for dwellings in 2005, and an annual average loss over that period of time is estimated at about EUR 18 million.

9. West Carpathian Mountains Are the Landslide Zone • The areas of greatest landslide risk lie in the South Western part of the Carpathian Mountains, and the average annual loss has been estimated to be about 2 orders of magnitude less than that of flooding at about EUR 125,000.

10. Hazard Risk Mitigation Project A World Bank project Hazard Risk Mitigation & Emergency Preparedness GEF Project was approved by the Bank in 2004. This was a broad project with a range of components, and included funding for the planning and for a catastrophe insurance scheme. The Romanian government responded in 2005 with a proposed scheme, but agreement was not reached with the World Bank on the structure suggested at that time.

11. Hazard Risk Mitigation Project A resident catastrophe insurance adviser was appointed in 2006 and consultancies contracted. The first project was titled an Integrated Disaster Risk Management Study and was executed by RMSI; and the second - Development of Guidelines on Risk Management, Assets Allocation and Operation is being executed by the Willis Group. The work on the law to establish a scheme was commencedin mid 2006 and the approval, required by several ministries and other official bodies, was delayed somewhat by the effects of changes in the government in early 2007.

12. Hazard Risk Mitigation Project A resident catastrophe insurance adviser was appointed in 2006 and consultancies contracted. An Integrated Disaster Risk Management Study was executed by RMSI; another one - Development of Guidelines on Risk Management, Assets Allocation and Operation was done by the Willis Group. The work on the law to establish a scheme was commencedin mid 2006 and the approval, required by several ministries and other official bodies, was delayed by the changes in the government in early 2007. However the law was approved by the government for submission to parliament for emergency procedure consideration on 29 September 2007.

13. Romanian Conditions Romania has a population of about 21 million and about 8 250 000 dwellings. The dwellings are of various types, as shown on the table.

14. Present Stage of the PRAC Scheme The most significant step in building the scheme was the acceptance of the reinsurance brokers offer to assist in the preparations for reinsurance. A consortium of the four major firms in the world was appointed, led by AON, with Benfield as lead modeller, and also including Guy Carpenter and Willis. The assistance, provided by the consortium, was invaluable not only with planning and design of reinsurance but also with high level technical support in other areas.

15. The Proposed Scheme PRAC The objective was to learn from the experience around the world. PRAC has been designed as a simple scheme and as low cost as possible. In summary: • The perils covered against are earthquake, flood and landslide; • Property covered is dwellings only, and all dwellings must be insured; • The scheme uses ‘community rating’; • Cover is on replacement basis up to limits which should rebuild a modest dwelling; • Insurers issue policies, and assess and settle claims;

16. The Proposed Scheme PRAC • All risk is reinsured with the pool company PAID, and then to be transferred to world markets; • The entity operating the scheme (called PAID – the Natural Disaster Insurance Pool) is to be a joint stock company owned by qualifying insurers; • Local government will assist with enforcing the compulsion to insure, with an incentive to do so; • The government will fund reinsurance premiums in early years, and act as lender of last resort in the event of overwhelming losses. The World Bank involvement in the project has comprised the funding of consultancies and high-level technical advice.

17. The Pool The entity to manage the Pool will be a joint stock company (PAID), with participating insurers as shareholders. The Insurance Supervisory Commission will approve insurers as qualifying to participate. Each will be required to contribute a minimum amount of capital with none having more than 15%, and there will need to be 5 at least for the scheme to start. PAID will be governed by a Board of Directors within which the only outside member will be from the Insurance Supervisory Commission. PAID will operate as a reinsurer and to some extent as an insurer as well.

18. Conclusions • The PRAC scheme is nearly ready to be born. While major logistical challenges lay ahead, the large amount of solid technical work done is an excellent foundation. • The boldness of the government in seeking to move ahead rapidly will hopefully bring the benefits of the insurance coverage before the next major disaster hits Romania.

19. Thank you Radu Popescu, Advisor in the Ministry of the Internal Affairs and the Administrative Reform