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Stefan Richter / Rainer Schönberger German Insurance Association

The legislations or regulations on catastrophe risks and the catastrophe insurance’s accounting requirements established by insurers or regulators in major EU countries. Stefan Richter / Rainer Schönberger German Insurance Association. Agenda - Catastrophe insurance in major EU countries.

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Stefan Richter / Rainer Schönberger German Insurance Association

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  1. The legislations or regulations on catastrophe risks and the catastrophe insurance’s accounting requirements established by insurers or regulators in major EU countries Stefan Richter / Rainer SchönbergerGerman Insurance Association

  2. Agenda - Catastrophe insurance in major EU countries  Starting position  Examination of the European models  Catastrophe Insurance project in Germany  The product  Risk potential and rates  Actuarial models  Rates and reinsurance  Financial reporting and solvency  Assessment of the overall situation  Annex: Verification structure for catastrophe insurance

  3. Agenda - Catastrophe insurance in major EU countries  Starting position  Examination of the European models  Catastrophe Insurance project in Germany  The product  Risk potential and rates  Actuarial models  Rates and reinsurance  Financial reporting and solvency  Assessment of the overall situation  Annex: Verification structure for catastrophe insurance

  4. Starting position (1) • Large increase in extreme events • Intensity of events steadily increasing • Disproportionate rise in losses through: • Increased settlement of exposed areas • Progressive concentration of assets • Expansion of basement space and technical equipment below ground level • Climate change • Actuarial situation • Low insurance dispersion due to lack of demand(problem of negative selection) • Decline in insurance services for exposed areas • Cutbacks and price increases in reinsurance capacities • Increase in insurance premiums

  5. 1.1 Past events Starting position (2) Number of emergency losses in Germany since 1970 30 25 20 15 10 5 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Miscellaneous (e.g. forest fires, avalanches, frost) Storm Flooding Earthquake Hail

  6. 1.1 Past events 6,000 4,000 2,000 2000 2002 1976 1978 1992 1994 1980 1982 1996 1998 1970 1972 1974 1984 1986 1988 1990 0 12 bill. € Starting position (3) Economic losses (euro millions)* * adjusted for inflation

  7. 1.1 Past events Starting position (4) Insured losses (euro millions)* 3.2 bill. € 2,500 2,000 1,500 1,000 500 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 * adjusted for inflation

  8. Starting position (5)Worldwide climate changes • Global effects ( IPCC document ) • Increase of 0.6 to 0.8 degrees Celsius in average temperature of earth’s surface in the 20th century • Model calculations for the 21st century show a temperature increase of between 1.4 and 5.8 degrees Celsius • Rise in sea level by 0.09 to 0.88 metres • Retreat of glaciers and thawing of permafrost soils • Increase in floods and droughts • Higher maximum temperatures – more hot days and heat waves • Higher minimum temperatures – fewer cold days, but increase in cold spells • IPCC: Inter-governmental panel for climate change

  9. 1.2. Climate changes Starting position (6)Effects of global climate change - temperature - Increase in global average temperature in the 21st century for the northern hemisphere and the polar regions there between+2 °C and +6 °C. - Increased ice melting - Rise in sea level

  10. 1.2. Climate changes Starting position (7)Effects of climate change worldwide – precipitations • Increase in precipitations in the Asiatic region by up to +1.5 mm per day • In connection with the increase in temperature, the climate cycle is increasingly being fuelled with energy which will manifest itself in distinctiveweather phenomena

  11. 1.2. Climate changes Starting position (8)Effects of climate change worldwide – sea level • Depending on the model calculation, the IPCC, based on forecasts for global warming in the 21st century, anticipates an increase in sea level of between 40 cm and 60 cm. • The increase forecast means that settlement will no longer be possible in some regions. • Even the most conservative model calculation shows that numerous islands in the South Seas (e.g. Tuvalu) will be flooded, and consequently will no longer be habitable.

  12. Agenda - Catastrophe insurance in major EU countries  Starting position  Examination of the European models  Catastrophe Insurance project in Germany  The product  Risk potential and rates  Actuarial models  Rates and reinsurance  Financial reporting and solvency  Assessment of the overall situation  Annex: Verification structure for catastrophe insurance

  13. Examination of the European models (1)Introduction • Storm and temperature insurance in the following countries will be looked at: • France • Spain • Switzerland • Federal Republic of Germany • The following will be highlighted: • Structure • Functionality • Strengths and weaknesses • The strengths and weaknesses of the German system will be shown using the flood catastrophe of August 2002 as an example

  14. Examination of the European models (2) France - Structure Government(CCR*) Reinsurance Insurance industry • Proportional RI- RI with unlimited liability ...§§.......... Statespecifiedstandardpremium Policyholder PrivateReinsurer Mandatory for - assets and vehicles - as soon as they are insuredagainst other risks *Caisse Centrale de Réassurance

  15. Examination of the European models (3)France – Functionality (1) • By law, the French government and the private insurance industry are to insure natural disaster and storm risks jointly. However, the private insurance industry bears the risk, manages the insurance portfolios and settles claims. • Catastrophe insurance can be provided as a general obligation, or as a compulsory addition to basic cover. France has opted for the compulsory route. Insurance is mandatory for all assets and land vehicles which are insured against “fire”, “other risks” or “loss of business”. • The state specifies a standard premium, except for the "storm" risk, which is a percentage of the basic insurance premium (e.g. for fire insurance). The same is true for deductibles.

  16. Examination of the European models (4)France – Functionality (2) • The state provides insurers with reinsurance capacity in two forms: • “proportional reinsurance” or • “reinsurance with an unlimited state guarantee”. • The proportional reinsurance rates and direct insurer deductibles have had to be raised in the past in order to keep the state-owned reinsurer “Caisse Centrale de Réassurance” (CCR) solvent.

  17. Examination of the European models (5)France – Strengths and weaknesses • The CatNat system has proved to be unstable since its establishment. The main reasons for this instability are: • politically motivated interference with claim payments and system design • the conduct of the state reinsurer CCR, which, in an attempt to improve its economic position by offering low premiums, merely succeeded in accumulating exposed risks, thus destabilising the system of comprehensive cross-subsidies and the model as a whole.

  18. Examination of the European models (6)Spain - Structure Premium Federal CatNat insurer“Consorcio” Insurance industry Refund of expenses Adjustmentof claim Encashment Policyholder Mandatory insurance - buildings and movables - - motor vehicles - - accident -

  19. Examination of the European models (7)Spain – Functionality (1) • From the systematic point of view, the Consorcio does not constitute a general compulsory insurance, but mandatory coverage. • Despite the formal changes introduced in the course of deregulation, the Consorcio remains Spain’s government insurance monopoly for natural disasters. • The Consorcio offers compensation for natural disasters, as well as losses with political or social causes (terrorism, unrest etc.).

  20. Examination of the European models (8)Spain – Functionality (2) • The Consorcio charges "levies" for numerous property “insurance contracts” in the form of "levy rates" (these are in fact premium rates) • The "levy" (insurance premium) is mandatory for buildings, building contents, vehicles and persons. • Standardised “premium rates” and “deductibles” apply. • Claims settlement is performed by the Consorcio itself. “Premiums” are collected by private insurers in return for reimbursement of costs.

  21. Examination of the European models (9)Spain – Strengths and weaknesses (1) • The restructuring of the Consorcio into an independent public company subordinated to the Finance/Economics Ministry did not alter the monopolistic character of this system. • This assumption is supported by the fact that, in practice, policyholders are refused access to private alternatives (“double insurance” since the “levy” to the Consorcio is not dispensed with).

  22. Examination of the European models (10)Spain – Strengths and weaknesses (2) • The system does not contain any incentives for prevention. Rather, it encourages policyholders to place their trust entirely in compensation in the event of a loss. • Due to a lack of reinsurance and risk-related premiums, the system will become unstable as extreme events become more frequent: • Losses and insured values will increase • Losses and increases in levies will spiral • This cycle can only be broken through the introduction of structural changes, e.g. by encouraging prevention

  23. Examination of the European models (11)Switzerland - Structure 7 Swiss cantons 19 Swiss cantons Private Insurance industry pool Government A/B/Cassign 85% of claims Cantonalmonopolyinsurer Pool allocates to A, B, C Insurer A Insurer B Insurer C Policy-holder ...§§.......... Policyholder Standard premium

  24. Examination of the European models (12)Switzerland – Functionality (1) • Switzerland systematically chose general compulsory insurance rather than mandatory cover. • There is no standardised national system in Switzerland for natural disaster insurance. • In some of the Swiss cantons, the public cantonal building insurers (KGV) offer natural disaster coverage as monopolies, while the private insurance industry offers such coverage in others. • Each building owner is under an obligation to take out insurance not only against the usual risks (fire, storm, hail), but also against natural disaster risks (flooding, avalanches, snow pressure, landslides, rock slides).

  25. Examination of the European models (13)Switzerland – Functionality (2) • Risks are balanced within the private insurance industry through a pool of private insurers. • Companies assign 85% of their natural disaster claim expenses to the pool, which distributes the claims burden across all of the pool members in proportion to the premium revenue of the relevant company. The private insurance sector is thus able to meet its obligation of compensation for losses. • On the other hand, the public cantonal building insurers rely solely on the extensive financial reserves they have accumulated in the past

  26. Examination of the European models (14)Switzerland – Strengths and weaknesses • The private insurance sector is restricted to 7 of the 26 cantons. These 7 cantons, however, do not reflect the risk situation of Switzerland’s federal territory. The opportunities for the private insurance sector to spread risk adequately are therefore heavily restricted. • Switzerland’s system does not offer a comprehensive solution for loss through catastrophe, as the policyholder, by virtue of limited liability to 25 million CHF per case of loss and 250 million CHF per event (for all losses !) must, in the event of doubt, bear the costs for a portion of the loss himself. This applies to both private and cantonal insurers.

  27. Examination of the European models(15) Germany - Structure Government Private Insurance industry At present, not involved Supply Demand Claims adjustment Premium Policyholder

  28. Examination of the European models(16)Germany – Functionality (1) • The insurance market in the Federal Republic of Germany has been deregulated since 1994, so that insurance for natural risks is offered by the private insurance industry rather than by a state monopoly. • The Special Terms and Conditions of the private insurance industry only covered the following risks: • Flooding (including heavy rains, pressurised water and backwater) • Earthquakes, land subsidence, landslides • Snow pressure, avalanches • Volcanic eruptions • Storm

  29. Examination of the European models(17)Germany – Functionality (2) • Insurance is voluntary. • The scope covers approx. 90% of inhabited areas; however, due to the general public’s lack of awareness of risk demand, it is modest. • There are no standard premium rates or deductibles; insurers must calculate them using statistical data and management ratios. • Because each risk has to be assessed on a case-by-case basis using statistical data, the zoning system ZÜRS has become an important element of catastrophe insurance in Germany.

  30. Examination of the European models (18)Germany – Functionality - ZÜRS (1) • ZÜRS: (Z)onierungssystem für (Ü)berschwemmung, (R)ückstau und (S)tarkregen [zoning system for floods, backwater and heavy rains] • ZÜRS provides an underwriting tool for the insurance industry which helps it to assess flood risk and offer a risk-related premium. • At the heart of the ZÜRS system is a database which uses address information (road network, house number data etc.) to show the risk of flooding for any requested area. • ZÜRS is used as a technical basis for future automated zoning systems (e.g. earthquake zones)

  31. Examination of the European models (19)Germany – Functionality - ZÜRS (2) The ZÜRS software modules • Three modules: ZÜRS Viewer, Blackbox and ZÜRS light database • Modules are adapted to their intended use, e.g.: • ZÜRS Viewer with graphic output at point-of-sale • Blackbox for batch processing of small-scale volumes of data at branch offices • ZÜRS light database for implementation of the data in the insurance industry’s mainframe computers. Automated data interrogation possible for the official in charge.

  32. Examination of the European models (20)Germany – Functionality - ZÜRS (3) Data basis:Digital elevation model Digital terrain model Digital terrain model as basis of work Extraction of elevation models from the terrain model Creation of an elevation for Germany Digital elevation model

  33. Examination of the European models (21)Germany – Functionality - ZÜRS (4) Data basis:Waterway network High degree of accuracy 1st and 2nd orderwaterways + flood-affected small-scale waterways recorded 50,000 kilometres of waterways are digitised

  34. Examination of the European models(22)Germany – Functionality - ZÜRS (5) Calculation offlood areas Hydrology - Specification of flood drainage 2. Statistics - Specification of basis for water quantity assessment 3. Hydraulics- Location calculation (drainage quantity, valley profile, roughness, speed, drop)- Narrow simulation grid

  35. Examination of the European models (23)Germany – Functionality - ZÜRS (6) Calculation offlood areas 10-yearly flood 50-yearly flood 200-yearly flood Co-ordination with the water economy Printout of results on analogue maps Visit to 200 water authorities Increased quality through • Consideration of anthropogenic influences • Incorporation of events that have actually occurred • Consideration of more accurate calculations

  36. Examination of the European models (24)Germany – Functionality - ZÜRS (7) Zone division in ZÜRS 2004 • GK 4, high threat: Statistically, flood at least once every 10 years • GK 3, medium threat: Statistically, floodat leastonce every 10-50 years • GK 2, low threat: Statistically, floodat leastonce every 50-200 years • GK 1, very low threat: Statistically, floodless frequent than once every 200 years GK1 GK4 GK2 GK3

  37. Examination of the European models (25) - GermanyStrengths and weaknesses using the flood of August 2002 as an example • In 2002, the Federal Republic of Germany was affected by an extreme flood event • At the time, • only 5% of buildings and • 10% of household goods in Germany were covered by catastrophe insurance, even though insurance could have been taken out for around 90% of the areas concerned. • The German system suffers from the fact that supply and demand have no common ground. • Despite the substantial economic losses incurred by the flood catastrophe, demand remained low( suppression of risk)

  38. Examination of the European models (26) – GermanyStrengths and weaknesses using the flood of August 2002 as an example • Degree of economic loss • Heaviest precipitations since weather records began in 1896 • Total loss € 9.1 billion (not including flood-related loss of earnings) • Commercial areas affected: businesses, industry, trade, inland waterway transportation, agriculture, tourism, infrastructure (roads, bridges, sections of railway line, power supply etc.) • Environmental damage as a consequence of heavy pollution of waterways

  39. Examination of the European models (27) – GermanyStrengths and weaknesses using the flood of August 2002 as an example • Loss areas involved • Infrastructure of Länder and municipalities: € 3.316 billion • Private households (residential buildings and household goods): € 2.547 billion • Commercial activity € 1.438 billion • Federal infrastructure[1]: € 1.353 billion  • Intervention and catastrophe prevention costs in the Länder: € 0.224 billion • Agriculture: € 0.192 billion [1]: Bahn AG facilities, federal motorways, federal highways, federal waterways, government-owned property, as well as the costs for the deployment of over 73,000 workers drawn from the Technisches Hilfswerk [relief organisation], the armed forces and the Federal Border Police

  40. Examination of the European models (28) – GermanyStrengths and weaknesses using the flood of August 2002 as an example • Problems caused by state financing of flood damage • The state paid out substantial subsidies to citizens affected by the flood in 2002 • However, continual compensation through state subsidies whenever catastrophes occur is causing considerable problems : • A large number of claims (municipal and district authorities, regional and federal ministries, Reconstruction Loan Corporation, Deutsche Ausgleichsbank and other institutions) • Parallelism of administrative procedures • Rapid, unbureaucratic aid was severely hampered • Release of funds slow as a result

  41. Examination of the European models (29) – GermanyStrengths and weaknesses using the flood of August 2002 as an example • Problems caused by state financing for flood damage (cont’d) • Question: Can financing of flood damage through taxation be justified? • Equal status of insured and uninsured –change of moral risk? • The insured could have saved their premiums • Critically important that insurance compensation is put before state reimbursement • Question: State help only in the event of major damage events?

  42. Examination of the European models (30) – GermanyStrengths and weaknesses using the flood of August 2002 as an example Economic need for action - conclusion • Distribution discussion ex post leads to high degree of uncertainty among affected parties(no contractual regulation such as contracts of insurance) • A large number of parties involved means a less-efficient solution (in addition to the lack of a general framework and non-existent experience of handling of damages) • Parallelism of voluntary private provision and extensive public aid(leads to displacement of private insurance with a higher requirement for public resources) Development of a concept from the economic aspect is required

  43. Agenda - Catastrophe insurance in major EU countries  Starting position  Examination of the European models  Catastrophe Insurance project in Germany  The product  Risk potential and rates  Actuarial models  Rates and reinsurance  Financial accounting and solvency  Assessment of the overall situation  Annex: Verification structure for catastrophe insurance

  44. Catastrophe Insurance project in GermanyProject commission • Preliminary considerations • on the extent of insurance cover(product design, risks, deductibles etc.) • on risk potential, rates and reinsurance • Development of actuarial models • based on obligatory insurance • or in the form of compulsory insurance • The following will also be examined • Original insurer model • Reinsurer model

  45. Catastrophe Insurance project in GermanyProduct (1) • Insured risks • Flood / heavy rains / backwater / pressurised water (natural cause) • Storm tide • Earthquake(fire due to earthquake is also covered) • Landslide(natural collapse of ground above natural hollow spaces) • Landslip • Snow pressure / avalanches • Storm / hail

  46. Catastrophe Insurance project in Germany Product (2) • Uninsured risks: • Cavity following drought • Gradual damage, etc. • Volcanic eruption • Meteorite impact • Standard exclusions(political risks, including acts of terror, fire etc., nuclear power, mains water, frost, lightning, short circuit and excess voltage damage)

  47. Catastrophe Insurance project in Germany Product (3) • Insured objects • Buildings used for housing purposes (minimum 50%), including neighbouring buildings Backup: definition of the term “building” • Buildings with primarily commercial (but also agricultural) use; up to € 5 million sum insured • Cost item limited to 10% of the indemnification limit up to a maximum of € 100,000

  48. Catastrophe Insurance project in Germany Backup: Definition of the term “building” • A building is a spatial enclosure designed for the protection of persons, animals or objects against the effects of weather. Permanently fixed to the ground, it is sufficiently stable to permit the accommodation of persons. • Necessary accessories such as sanitary, heating, water and electrical installations, built-in kitchen furniture and neighbouring buildings (e.g. garages, car ports or garden sheds) are included in building insurance cover

  49. Catastrophe Insurance project in Germany Product (5) • Uninsured objects / damage • Buildings not ready for use(first-time purchase) • Buildings earmarked for demolition • Contents, BU (Berufsunfähigkeit? = occupational disability) • Isolated special-purpose buildings (allotment sheds, field barns, etc.)

  50. Catastrophe Insurance project in Germany Product (6) • Insurable value • Reinstatement value: with dynamisation • Procedures still need to be developed for binding arrangements in individual cases and on how to handle changes in assets where a total limit applies • Deductibles • Exposed risks (ZÜRS zones III and IV; storm tide, earthquake):Deductible of 5% of sum insured, min. € 5,000, max. € 50,000 per event and place of insurance. • Non-exposed risks: deductible of 0.5 % of sum insured, min. € 500, max. € 5,000 per event and place of insurance.

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