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Insurance of catastrophe risks in Germany Prof. Dr. Martin Balleer,

Insurance of catastrophe risks in Germany Prof. Dr. Martin Balleer, Georg-August-Universität Göttingen, Germany European Actuarial Academy (EAA) 05th – 07th June 2015, Arandelovac, Serbia X II I International Symposium on Insurance

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Insurance of catastrophe risks in Germany Prof. Dr. Martin Balleer,

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  1. Insurance of catastrophe risks in Germany Prof. Dr. Martin Balleer, Georg-August-Universität Göttingen, Germany European Actuarial Academy (EAA) 05th – 07th June 2015, Arandelovac, Serbia XIII International Symposium on Insurance „CATASTROPHE RISK MANAGEMENT AND SUSTAINABLE DEVELOPMENT“

  2. Insurance of catastrophe risks in Germany Natural disasters Man-made disasters Source: Sigma 1/2011

  3. Insurance of catastrophe risks in Germany Number of terrorism attacks from 1982 - 2003

  4. Insurance of catastrophe risks in Germany History • Originally damages generated by terroristic acts were included in the insurance coverage of property - without any terrorism exclusions or special underwriting procedures • The terrorist attack of 9/11 in 2001 has changed the situation. Around $ 38 billion had been paid by the insurance industry to cover insurance risks generated by 9/11. • The consequence: The reinsurance companies cancelled the property insurance as well as the casualty insurance and offered a prolongation by excluding terroristic risks or – minimum - granting terrorism coverage only on a very low level. The primary insurers followed. • The result: An insurance coverage of industrial risks and other large risks were not available anymore. But a limited risk transfer – a relevant production factor - could slow economic recovery and growth. Specific terrorism insurance policies were born.

  5. Insurance of catastrophe risks in Germany Definition of terrorism „…´acts of terrorism´ means acts of persons acting on behalf of, or in connection with,any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty´s government in the United Kingdom or any other government de jure or de facto“. (PoolRe, United Kingdom, since 1993) „…´acts of terrorism means acts of persons or groups of persons acting in order to reach political, religious,ethnical or ideological targets that are able to spread fear and terror within the population or parts of the population and therefore to generate influence on the government or other state organisations.“ (EXTREMUS, Germany, since 2002). Meanwhile terrorism risks are also seen as man-made CAT-risks against the background that the amount of claims often reaches the amount of natural disasters like earthquake etc. (see 9/11 in New York).

  6. Insurance of catastrophe risks in Germany EXTREMUS AG • Established September 2002, acceptingbusinessfrom November 2002 • Foundedby 16 majorinsurancecompaniesinvolved in CAT-risksasshareholders: Allianz, AIG, Deutsche Rück, DEVK, Generali, Gothaer, HDI, HUK-Coburg, LVM, Munich Re, R+V, Signal Iduna, Swiss Re, VHV, Zurich-Group. • Working as a reinsurerfordomesticprimaryinsurerswhoareabletocedeterrorism cover for larger risksthatexceed € 25 million (=retention). • EXTREMUS isoffering maximal € 10 billionas a terrorismcoveragebyintegrating a guaranteeof € 8 billionbythegovernment. • Riskcoverageisn´tobligatory, but 98% ofcompaniesareusing EXTREMUS as a riskcarrierforterrorismrisksprovidedthattheyaccept a retentionof € 25 million. • Riskcoveragecanonlybeboughtforrisks in Germany. EXTREMUS also providesrisk cover forothermarkets in cooperationwithLloyd´ssyndicates.

  7. Insurance of catastrophe risks in Germany EXTREMUS AG Limits of the public-private partnership 1.layer: € 25 million by underwriting companies 2.layer: € 2 billion in the annual aggregate co-insured by EXTREMUS members; the maximum of risk cover is reinsured by national and international insurance markets 3.layer: € 8 billion in the annual aggregate in excess of € 2 billion given by the government; the government is participating in the premiums; this solution is in concordance with article 87 EGV (European Community Contract): Maximal annual aggregate limit of € 1,5 billion for each policy or enterprise. Premium calculation: Premiums rates are based on geographical zones.

  8. Insurance of catastrophe risks in Germany EXTREMUS AG Coverage • Appliestophysicaldamage and businessinterruptionforpropertyforrisksvalued at over € 25 million. • Included: Only covers actsofterrorismoccurring in Germany. The cover followsthe same conditions and all locationsoftheunderlyingpropertypolicy, meaningthat an insuredcannotelectonlyto cover certain high-risklocationswith EXTREMUS. Vehicles and theircargocanbecovered.The cover includes a 24 hoursoccurenceclause. • Excluded: Sabotage, war/civil war, civildisorder/looting, confiscation, nuclear, biological and chemicalcontamination (exceptifsubstancesarealreadykept on theinsuredproperty), worksofart, computervirusses/dataloss etc., marine and aviation.

  9. Insurance of catastrophe risks in Germany EXTREMUS AG Business development Gross premiums Number of contracts Insured sum Maximum annual limit Risk locations

  10. Insurance of catastrophe risks in Germany Outlook on international aspects • The schemesforterrorismcoveragedifferfromcountrytocountrywithregardtothedefinitionofterrorism, withregardtotheexclusions, withregardtothestateguarantees and withregardtotheamountofthecoverageavailable. Nearly all schemesaredefinedwithgovernmentparticipation. Manycoutriesofferunlimited cover withthegovernmentactingastheinsurerof last resort. • Principallythecoverageisofferedforactsofterrorismwithintheterritoriesofthatcountryonly. So the design of global terrorisminsuranceprogrammesisrathercomplex. • Nevertheless: A strong commercialmarketforterrorisminsurancehasbeendeveloped – bothfordomesticterrorism cover aswellasfor global terrorisminsuranceprogramsagainstthebackgroundthat international companiestrytorequire a global terrorisminsurancepolicy. The coveragetakesadvantageoftheincreasinguseofthecapitalmarketby Alternative Risk Transfer. Source: airmic Technical, Terrorism Insurance Review, Report 2013

  11. Insurance of catastrophe risks in Germany Outlook on international aspects: United Kingdom • Pool Re-insurance Company Lt. (Pool Re), established in 1993, providingreinsurancetomemberinsurers,whichincludesterrorismcoverageundertheirpropertypolicies. Appliestopropertydamagepolicies, whichincludeterrorism cover in UK. • Coverage: The schemeusesthedefinitionof an Act ofTerrorism (seeabove). War and relatedrisksareexcludedaswellasdamagestocomputersystemscausedbyvirus,hackingorsimiliaractions. Thereisnoexclusionforchemical, biological, radiologicalornuclearcontamination– subjecttothetermsofthepolicy. • Unlimitedmaximumpoollosses. 1st layer: Eachinsurerupto an individual threshold; 2nd layer: Reservesaccumulatedbytheinsuranceindustrywithin Pool Re; 3rd layer: Exceedingclaimscanbedrawnfromthegovernment, regardlessofthescaleoflosses. • Premium ratesarebetween 0.03% (central London) and 0.006% (restof UK).

  12. Insurance of catastrophe risks in Germany Outlook on international aspects: United States ofAmerica • TerrorismRisk Insurance Act (TRIA), established in 2002 as a consequenceof 9/11, and extendedbythe U.S. TerrorismRisk Insurance ProgramReauthorisation Act (TRIPRA) in 2007. • Coverage: Covering all commercialproperty & casualtylines. TRIA istriggeredwhenstateinstitutionsarecertifyingtheactas a terrorismact ( minimum $ 5 millionloss) and takeplace on U.S. soil. Excludedarefinancialguarantees, burglary, professional liability, medicalmalpractice etc. • Limits of $ 100 billionannualaggregate, includinginsuranceindustryaggregateretentions. Insofarinsurersare „capped“ at theirretentionlevels. • Premium ratesare flexible, dependend on theunderwritingoftheinsurer. Average premium rates in %0 of insured risks

  13. Insurance of catastrophe risks in Germany Outlook on international aspects: France • Pool: Gestion de L´Assurance et de la Reassurance de Risque Attentats et Actes de Terrorisme (GAREAT), established in 2002, in ordertosuppoertthedomesticinsurersthatareforcedbylawtointegrateterrorism cover. • Coverage: Compulsoryfor all companies, appliedtoproperty and businessinterruptionlossesfromcommercial, industrial and professional riskswherethesuminsuredexceeds € 6 million– providedthattheinsurancecontract covers forpropertydamage. Coverageincludesrisksdomicilated in France and overseesdepartmentsof France. All actsofterrorismareincluded. Riskscoveredby marine, aviation and transportare not covered. • Unlimitedpoollosses: 1st layer: € 400 millionco-insuredby GAREAT members; 2nd layer: € 1,9 billion in excessreinsuredby international reinsurancemarket; 3rd layer: Unlimited, reinsuredbythegovernmentownedCaisseCentrale et Reássurance (CCR). • Premium rates:6% (€ 6 - € 20 million), 12% (€ 20 - € 50 million), 18% (over € 50 million) oftheinsuredvalue.

  14. Thank you for your attention ! Dr. Martin Balleer martin.balleer@actuarial-academy.com

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