Europe: Continental catastrophes

saxony-floods

An EC Green Paper proposing harmonisation of catastrophe insurance across Europe has faced strong criticism from the market. Edmund Tirbutt explains why.

In April, the European Commission unveiled a Green Paper provoking a widespread debate on the adequacy, and availability, of existing insurance options for natural and man-made disasters.

In addition to loss of life, natural disasters cause the European Union billions of euros of damage every year, affecting economic stability and growth. Disasters may have cross-border implications, potentially threatening entire areas in neighbouring countries.

Even if the resulting costs are locally concentrated, inadequate insurance cover can result in individual member states carrying large fiscal burdens - which could cause internal and external imbalances.

Paper content
The Green Paper is a fact finding mission to guide policy and asks a series of questions rather than suggests purport potential measures. However, the paper moots the possibility of introducing compulsory insurance for disasters for citizens of member states, disaster insurance pools or governments acting as a fund of last resort.

A widely expressed reservation of the non-risk-based approach is that it could work out more expensive than voluntary insurance as it could involve moral hazard - by not encouraging the development and implementation of risk control measures. Checking whether nationals have insurance or not could also prove costly.

An even greater stumbling block is that a single insurance system is unlikely to fit with the cultural and legal systems of different countries - some of which have markedly different insurance arrangements in place.

"In the UK and Germany it's wind and flood that dominate whereas in the Mediterranean it's more earthquakes." Simic

For example, in France and Spain, property insurance policyholders have to pay a non-risk-based levy to cater for natural disasters. In the UK and Germany, on the other hand, there is no such Government interference and 99% of both populations can purchase natural catastrophe insurance on the open market.

Milan Simic, senior vice president and managing director of AIR Worldwide says: "Given the level of harmonisation in Europe, catastrophe insurance is one area with the least amount of harmonisation. It would be difficult to achieve any concessions on the matter as all countries are starting from different points with the range of perils very different.

"For example, in the UK and Germany it's wind and flood that dominate whereas in the Mediterranean it's more earthquakes. Even within a single country it's difficult to make changes as there are so many different stakeholders."

Further drawbacks
Industry bodies and other experts have found more drawbacks. Insurance Europe director general Michaela Koller strongly recommends keeping the EU discussions on man-made environmental disasters and natural catastrophes separate because the insurability of each risk is affected by different factors.

Oliver Hauner, head of property and engineering insurance, loss prevention at the German Insurance Association, criticises the paper for relying on information gathered by the Joint Research Centre of the European Commission. He says: "This data is not reliable and many experts say that it tries to compare apples with pears. The insurance industry and other bodies have a lot of data that the Green Paper never asked for."

Alessandro De Felice, chief risk officer at Prysmian Group and vice president of the Federation of European Risk Management Associations believes that one important question left unanswered by the paper is which body would have the authority to decide whether an event qualifies as a major disaster at EU level?

"This data is not reliable and many experts say that it tries to compare apples with pears. The insurance industry and other bodies have a lot of data that the Green Paper never asked for." Hauner

He says: "The suggestion seems to be that some events are more important than a catastrophic one recognised and decided at a national scale. Which criteria are going to be taken into account and how would it be possible to get a quick consensus through EU member States to finance the damages in one or a few countries? Companies could face delays in being able to claim from their insurers before this decision is made."

Although the Green Paper consultation period ended this July, the next step is unclear. However, with the initial publication stoking strong debate a further consultation, with revised proposals, could be a possibility.

Best practice
Feedback from respondents suggests this has been the case. For example, The Association of British Insurers does not want compulsion but would like to see best practice and help to put systems in place when required. The European Federation of Insurance Intermediaries is also opposed to a mandatory insurance scheme but believes that improved access to data and greater standardisation of data in order to facilitate comparability would be of benefit to the insurance industry.

While no-one is expecting any changes at the moment, compulsory cover remains the point causing most concern among commentators. However, while many are opposed to mandatory cover, not everyone believes it is unachievable. Indeed, it could prove a boon for the reinsurance industry.

Simic concludes: "It wouldn't be the end if premiums were calculated on a sound actuarial basis and it would actually provide a boost for reinsurance because most of the pools that could be introduced would be heavily reinsured."

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