Policy Advice on
Insurance against Natural Catastrophes
This Project is funded by
the European Union
A Project implemented by GDV
1
2
I.Introduction
Helmut Müller
The objectives of this investigation have been defined in the Terms of Reference.
In particular, the subject of our assignment was a research into the cat risk handling in EU
countries (insurance, prevention, state intervention, alternative risk transfer) and offer suggestions on how to deal with cat risks by China’s insurance industry and government bodies.
Within this assignment, we have been expected to seek the solutions to the following issues:
Choose two or three countries which have established catastrophe insurance mechanisms in
the EU and mainly learn about:
1. The legal provisions for catastrophe insurance, or for earthquake, flood, and typhoon
(windstorm) insurance;
2. The role of governments in catastrophe insurance, that is, whether catastrophe insurance is compulsory, whether it has tax preference, whether a compensation fund has
been established, etc.;
3. The underwriting models of catastrophe insurance, that is, whether a single insurance
mechanism is established for each type of catastrophe or several catastrophe risks are
underwritten in a package, or underwritten in other forms;
4. The regulatory authorities and regulatory modes of catastrophe insurance
5. The risk transfer models of catastrophe insurance, namely international cession, domestically establishing a pool to underwrite jointly, or securitizing in the capital market;
6. For catastrophe insurance, main disaster prevention and loss prevention measures taken by the government and the insurance industry
7. The accounting requirements of insurance companies (or the regulatory authorities)
for catastrophe insurance, e.g. standard of provision, etc.
We have been expected to implement this program by fulfilling the following tasks:
8. Make the in-depth research and collect information on the latest developments and
new trend of underwriting mode and risk transfer mode for cat risk insurance.
9. Write the presentation based on the above research entitled “underwriting mode and
risk transfer mode for cat risk insurance in major EU countries” , with the focus on
following points:
a) What kind of underwriting mode is adopted by EU insurers for the Catastrophe insurance? Do the insurers underwrite the cat risk by line or by package, or by other
resolutions?
b) What are the risk transfer modes for cat risk insurance? Are the cat risks transferred through international re-insurance, or through setting up cat risk pool in the
3
local market, or through cat risk securitization in the capital market?
c) What are the major loss prevention measurers/solutions for cat risks adopted by the
governments and insurers?
10. Hold 1-day discussion with CIRC for preparing the workshop jointly with other 2 experts.
11. Address to the 2-day workshop in China.
12. Jointly with other 2 experts, hold discussions with CIRC on the findings and offer professional suggestions to China.
Preliminary reports regarding the Earthquake Insurance in Europe – Greece, Italy, Portugal
and Turkey - and Natural Disaster Insurance in Europe were prepared and send to CIRC in
March and August 2004 by Anselm Smolka of Munich Re respectively by Stefan Richter and
Rainer Schönberger of the GDV, the Association of the German Insurance Industry.
Furthermore, a 5-people delegation of CIRC has been invited to Greece and Italy in August
2004 for an on-site investigation and research regarding the insurability of CatNat Risks.
During another study tour to Europe a delegation of CIRC had the opportunity to discuss the
role of the reinsurance not only but also in the sector of CatNat risks. This seminar from 26th
of September to 1st of October 2004 was offered by Munich Re in Schloß Hohenkammer,
Germany.
The preliminary reports have been introduced into PowerPoint presentations. On the basis of
these presentations a seminar with additional discussions were held in Lijiang, Yunnan Province on 19th of October 2004. The results of our discussions with representatives of CIRC,
Chinese universities and insurance companies have been incorporated into this final version
of the report.
In the seminar we have concentrated our investigation on the possibilities to insure CatNat
risks. Presentation have been given by Stefan Richter and Rainer Schönberger about “The
legislations or regulations on catastrophe risks and the catastrophe insurance’s accounting
requirements established by insurers or regulators in major EU countries” and Ms. Margarita
Antonaki, General Manager of the Association of Greek Insurance Companies, about
“ Greece – Cover of Natural Catastrophes”.
All presentations in the seminar are enclosed in the Appendices.
4
II.
Earthquake Insurance in Europe –
Greece, Italy, Portugal and Turkey
A Survey for the Chinese Insurance Regulatory Commission (CIRC)
Anselm Smolka1
Introduction
1. Earthquake hazard and risk
The overall hazard according to Munich Re’s World Map of Natural Hazards is depicted in
Fig. 1 on the following page.
The highest hazard is generally found in Turkey, followed by Greece, Italy and Portugal. In
terms of risk, the situation is different. Risk arises from the combination of hazard and population density, which leads to a fairly high risk in Portugal as its capital Lisbon can and has
been affected by catastrophic earthquakes. In Italy, by contrast, the highest concentration of
people and values is found in the Po plain in the North where the hazard is low. Also, in
Greece the capital and economic centre Athens is not exposed to large earthquakes, which is
true in spite of the moderate shake of 1999.
When we set this assessment in relation to the Chinese situation, the following can be observed: also in China the regions of rather low and moderate hazard coincide with the most
populated regions and vice versa, like in Italy.
The difference, however, is that in spite of the rather low degree of earthquake activity in
Central and Coastal Southern China there is a small chance of truly great earthquakes, as
demonstrated most recently by the Tangshan earthquake in 1976. But also Beijing and
Guangdong have a history of being affected by great earthquakes. This creates a situation
which is comparable to Portugal where Lisbon – notwithstanding a generally low hazard in
general – has repeatedly suffered from earthquake disasters, the most famous one being the
earthquake of 1755.
Lists of the most disastrous earthquakes in the four countries can be found in the countryspecific sections, together with the number of victims, economic and insured losses.
1
Dr. Anselm Smolka, Munich Reinsurance Company,
Operational Division: CUGC3-GEO
D-80791 Munich
Phone:+ 49 89 3891 – 5294
Fax: + 49 89 3891 - 75294
5
2. Insurance solutions
Earthquake insurance is managed in all four countries by the private insurance industry.
In Turkey, the coverage by private companies is supplemented by a government operated pool,
the Turkish Catastrophe Insurance Pool (TCIP) which cares for the basic coverage of dwellings. The pool is 100% reinsured abroad. In the other three countries pool solutions have been
under discussion, but none has come into existence so far.
The only European countries – except Turkey - where governments are involved in earthquake insurance are Spain (Consorcio de Compensación) and France (”CatNat”- scheme).
In general, earthquake coverage is given as a special addendum to an existing fire policy, i.e.
there is no stand-alone coverage for this peril. The policies cover earthquake shock and fire
following earthquake, as the latter is excluded from the standard fire coverage.
Official tariffs exist only in Portugal and Turkey, whereas in Italy and Greece there are no
restrictions or regulations as regards rates and conditions of coverage.
Deductibles in % of the total sum insured (TSI) are used to a different extent in the various
countries, as well as proportional coinsurance (or loss deductibles) and sublimits. Deductibles
and limits are usually applied per site, and separately for buildings and contents. More detail
is provided in the country-specific chapters hereafter.
The insurance penetration is quite different in the residential and the commercial/industrial
sectors, and per country, but it is difficult to give precise estimates.
In commerce and industry, the coverage is fairly common in Italy and Portugal, and to a lesser
degree in Turkey and Greece. For residential objects, coverage is not uncommon in Portugal,
especially for housing schemes. In Greece, the coverage has become a requirement for buildings financed by a mortgage. This has increased the penetration rate substantially, whereas in
Italy the market penetration is still almost negligible.
Under the TCIP scheme in Turkey about two million policies have been sold so far. This figure represents a great advance compared to the situation before the Izmit earthquake in 1999.
But in view of a total population of 68 million living in 15–20 million housing units, it is a
rather low figure for an insurance scheme that is meant to be compulsory.
There is no systematic pattern regarding the type of insurance solutions chosen in the four
countries and their degree of seismic hazard and risk. The insurance solutions in the four
countries seem to be dictated more by the political framework than by the risk situation. The
foundation of the TCIP in Turkey, for example, would not have been possible without the
heavy involvement of the World Bank, although the 1999 Izmit earthquake surely served as a
catalyst to accelerate its development.
It was the low penetration rate especially in the residential sector that had led to discussions
on the introduction of similar compulsory earthquake insurance schemes in Italy and Greece
since many years. Although the design of such schemes had been advanced to a fairly mature
stage, none of them has passed legislation up to now.
The envisaged capacity under the corresponding insurance pools was in the range of US$ 3bn.
In Portugal, the foundation of an insurance pool with involvement of the state as a reinsurer of
last resort has been considered, too, but for other reasons. The already achieved degree of
6
market penetration and nevertheless continuing demand for earthquake cover has caused a
shortage of internationally available reinsurance capacity in this market. But also there the
process has remained at the theoretical stage so far.
Total insured accumulations are only known for Turkey and Portugal where they are in the
range of US$ 150bn and 95bn respectively.
7
8
Figure 1: Earthquake Hazard Map of South Europe
Greece
1. Earthquake disasters
Deaths
Date
Area affected
1201
Oct. 1491
01.04.1609
07.06.1750
16.02.1810
03.04.1881
Aegean Sea
Kos
E Rhodes Island
Peloponnese
Crete
Chios. Turkey, Cesme
W, Islands of Cephalonia,
Levkas, Sami, Zakynthos,
Ithaka
C, Thessalia
SE, Santorin
N, Saloniki, Laganda
C, S, Corinth, Loutraki
W, Preveza
S, Peloponnes, esp.
Kalamata, Eleochori
N, Kosani, Grevena
S, Gulf of Corinth, Egion
S, Athens (Plaka)
12.08.1953
30.04.1954
09.07.1956
20.06.1978
24.-25.2.1981
10.03.1981
13.09.1986
13.05.1995
15.06.1995
07.09.1999
Economic
losses
US$ m
Insured
losses
US$ m
40,000
5,000
10,000
2,000
2,000
7,886
-
-
455
100
-
25
53
50
20
3
3
>5
250
900
-
5
-
20
745
-
26
26
143
>450
660
4,200
120
2. Insurance
The existing tariff was completely abolished in 1997 when national law was harmonised with
EU directives. This means there is neither an official earthquake tariff in Greece, nor is there
any "indicative" tariff.
Also, there is no market standard in respect of original rating factors to be used. However,
reinsurers receive a net earthquake rate of 1.2‰ on earthquake liabilities ceded under proportional reinsurance treaties countrywide, and that goes along with a deductible of 2% on the
total sum insured.
Insured losses in the 1999 Athens earthquake amounted to about US$ 130m out of a total material damage of US$ 4bn for buildings. This indicates a very low insurance penetration and –
after earlier attempts – gave rise to renewed considerations regarding an earthquake insurance
pool which have, however, not materialised so far. Nonetheless, insurance density has increased in recent years in the residential sector due to the fact that access to mortgages for
financing the construction of new homes has become much more popular, and that mortgage
banks require earthquake coverage as a precondition of the loan.
9
Italy
1. Earthquake disasters
Date
Area affected
Deaths
04.02.1169
25.12.1222
05.12.1456
30.07.1627
05.06.1688
11.01.1693
08.09.1694
Jan. - Feb. 1703
04.02.1783
26.07.1805
14.08.1851
16.12.1857
28.07.1883
23.02.1887
08.09.1905
1906
1907
28.12.1908
S, Sicily
Brescia
Isernia, Benevent
Foggia
Campania
Catania, Siracusa
Irpinia
Umbria
Calabria
Campobasso
Melfi
Basilicata
Ischia
Liguria
S, Calabria region
S, Calabria
S, Calabria
S, Reggio di Calabria;
Sicily, Messina
C, Avezzano, Fucino
Mugello
Lunigiana, Garfagnana
Irpinia
S, Sicily, Belice Valley
NE, Friuli region, esp.
Udine, Cordinone,
Gemona, Osoppo, Forgaria
S, Irpinia, Basilicata prov.,
Avellino, Potenza,
Salerno, Naples
S, Sicily E, Carlentini area
C, Umbria, Marche
regions, esp. Assisi
C, Umbria, Marche, Val
Nerina, Colfiorito
S, C, San Giuliano di
Puglia; Molise
14,000
12,000
30,000
5,000
10,000
60,000
6,500
10,000
29,000
5,573
700
12,300
2,317
640
5,000
557
167
85,925
13.01.1915
1919
1920
23.07.1930
15.01.1968
06.05.1976
23.11.1980
13.12.1990
26.09.1997
21.-22.03.,
27.03.1998
31.10./01.11.2002
10
32,610
est100
171
1,778
231
965
Economic
losses
US$ m
116
25
320
3,600
Insured
losses
US$ m
-
2,914
11,800
19
11
500
6,000
-
-
-
2
29
est300
40
5
-
2. Insurance
The existing tariff was completely abolished several years ago. This means there is no official
earthquake tariff in Italy, nor is there any "indicative" tariff or a market agreement. Insurance
is almost exclusively bought in the commercial and industrial sector, and there it is fairly
common. Residential homes are usually not insured.
Under actual practice an average rate of 0.1–0.15‰ is charged, except in high risk areas
where rates are accordingly higher. Deductibles are low, but a proportional coinsurance (=
loss deductible) of 10% with a specified minimum amount is common. Also, the coverage is
often limited by a sublimit of, for example, 50% of the total value which, however, does not
reduce the risk of accumulated catastrophe losses to any sizeable degree. When judging the
fairly low rate level, one has to keep in mind that the most highly industrialised areas in Italy
are located in low-hazard regions.
Portugal
1. Earthquake disasters
Date
Area affected
1151
1344
24.08.1356
26.01.1531
28.01.1551
01.11.1755
23.04.1909
31.08.1926
14.05.1958
18.02.1964
28.02.1969
01.01.1980
W, Lisboa
W, Lisboa
W, Lisboa
W, Lisboa
W, Lisboa
W, Lisboa
W, near Benavente, Lisboa
W, Azores, Fayal, Horta
W, Azores, Horta
W, Azores
S, Algarve
W, Azores, esp. Terceira,
Fajal, Gaciosa
W, Azores, Fajal island,
Horta; Pico island
09.07.1998
Deaths
>1,000
30,000
2,000
est30,000
10
11
57
Economic
losses
US$ m
1
est5
est1
>25
est5
>25
5
est25
2
40
10
70
Insured
losses
US$ m
-
2. Insurance
The Portuguese Insurance Association (APS) released a new earthquake tariff in 1998 whose
rates had been based on an in-depth scientific study undertaken on behalf of a Technical
11
Working Group under the leadership of the University and the Technical University of Lisbon.
Rates are graded according to APS hazard zones and risk categories.
The actual version of this tariff that comes into force on 1 April 2004 is set out below: Basic
tariff (buildings constructed after 1985)
Rate in ‰,
TSI < €5m
0.6
0.45
0.2
0.2
0.2
Hazard zone
a
b
c
d
e
Rate in ‰,
TSI > €5m
0.42
0.32
0.14
0.14
0.14

Deductible: 5% of TSI

Coinsurance: none

Loading for construction date between 1960 and 1985: 30%

Loading for construction date before 1960: 100%

Contents: 50% of building rates
Rate multipliers for other deductible/coinsurance options:
Deductible
5%
10%
0%
1,0
0.8
Coinsurance
10%
0.85
0.68
20%
0.75
0.6
30%
0.65
0.52
As reinsurance capacity is short, considerations are underway to introduce a pool solution in
order to create additional earthquake capacity.
Turkey
1. Earthquake disasters
Date
Area affected
Deaths
11.10.1254
1268
1458
14.09.1509
Erzincan
Kilikien (Silicia)
Erzincan
Istanbul, Izmit, Bolu, Edirne
15,000
60,000
32,000
5,000
12
Economic
losses
US$ m
-
Insured
losses
US$ m
-
12.06.1542
1577
27.06.1583
1598
Date
Thrace peninsula, Istanbul
Balikesir district
Erzincan, eastern Anatolia
Amasya, Black Sea
Area affected
21.06.1648
22.02.1653
24.11.1666
17.08.1668
10.07.1688
25.02.1702
09.05.1717
17.11.1717
25.5.1719
09.1723
29.07.1752
02.09.1754
22.05.1766
29.12.1776
03.-05.07.1778
18.07.1784
28.05.1789
Istanbul
Izmir
Erzincan
Bolu, Ankara
Izmir (Smyrna)
Denizli
Kayseri
Denizli
Izmit
Izmir
Edirne, Istanbul
Istanbul
Istanbul
Merzifon, Vezirköprü
Izmir
Erzincan
South Anatolia, Harput,
Mazgid
Antakya. Syria, Aleppo,
Halab
Izmir, Cesme
Yalova, Istanbul
Cankiri
Malazgirt
Mürefte
Afyon-Bolvadin
Pasinler
Kars
Hakkari Siniri
Digor
Kirsehir
Erzincan
Van-Ercis
Niksar-Erbaa
03.04.1872
15.10.1883
1891
09.03.1902
28./29.4.1903
09.08.1912
04.10.1914
13.09.1924
02.10.1926
06.05.1930
01.05.1935
19.04.1938
26.12.1939
10.09.1941
20.12.1942
4,500
40
15,000
>60,000
Deaths
est30,000
5,000
1,500
7,800
5,000
12,000
8,000
6,000
6,000
450
100
800
4,000
100
200
12,000
51,000
13
Economic
losses
US$ m
-
Insured
losses
US$ m
-
1,800
-
-
15,000
4
2,626
216
400
310
355
2,514
200
149
32,962
194
3,000
-
-
20
-
-
20.06.1943
26.11.1943
01.02.1944
31.5.1946
Date
17.8.1949
3.1.1952
18.3.1953
19.8.1966
28.3.1970
22.5.1971
6.9.1975
24.11.1976
30.10.1983
13.3.1992
1.10.1995
27.6.1998
17.08.1999
12.11.1999
1.5.2003
Adapazari-Hendek
Tosya-Ladik Tosya-Ladik
Bolu-Gerede Bolu-Gerede
Varto-Hingis
Area affected
336
2,824
3,959
836
Deaths
Karliova
Hasankale
NW
Varto
Gediz
Bingöl
Lice, Diyarbakir
Muradiye, Manisa, Caldiran
Anatolia E, Horasan
Erzincan + Tunceli
Dinar area, Evciler, Afyon
Ceyhan, Adana
Izmit, Istanbul, Gölcük, Sakarya, Yalova
Düzce, Adapazari
Bingöl, Celtiksuyu
-
Insured
losses
US$ m
13
>1
600
25
25
450
133
265
2,400
1,086
878
2,385
3,840
1,346
653
94
144
15,000
Economic
losses
US$ m
>25
35
9
17
25
750
205
550
12,000
845
est176
est500
-
>40
-
2. Insurance
A new Turkish earthquake tariff was released after the Izmit earthquake in 1999.
The rates shown in the table below represent the current version of the tariff. They apply to
commercial and industrial risks and refer to a deductible of 2% and a coinsurance of 20%.
The original tariff scheme allows for a wide range of deductible and coinsurance options.
In actual practice, a combination of 20% coinsurance and 3% deductible is the most common
solution. The tariff is mandatory for risks up to a sum insured of US$ 100m. Above this limit,
the rate can be freely negotiated. It should be noted that the Turkish hazard zoning scheme
shows a decreasing hazard from zone 1 to zone 5, as opposed to the Munich Re zoning
scheme where the hazard increases with the zone number.
Construction type
Steel or reinforced concrete
Brick/stone
Others
Zone 1
‰
Zone 2
‰
Zone 3
‰
Zone 4
‰
Zone 5
‰
2.12
1.46
0.76
0.41
0.29
4.44
5.83
3.00
3.84
1.53
1.95
0.59
1.06
0.41
0.77
14

Coinsurance: The coinsurance percentage can be increased to 60%, the corresponding
maximum rebate to the tariff rate is 50%.

Deductible: The deductible can be increased up to 10%, the corresponding maximum
rebate is 30%.

Limits: For risks with a TSI >US$ 15m first-loss limits between 2 and 20% can be
chosen, with corresponding rebates ranging between 70 and 5%.
There are different tariffs for

Civil (=residential) risks – differences are very minor.

Risks under construction – 50% of above rates.

Electronic equipment – virtually identical with commercial/industrial.
The Turkish Catastrophe Insurance Pool (TCIP)
To overcome the low insurance penetration in the residential sector, which was illustrated
once again by the Izmit earthquake of 1999, the Turkish Catastrophe Insurance Pool was established with ´the assistance of the World Bank, professional reinsurers, reinsurance intermediaries and private risk consultants.
At present, about two million policies have been sold. The scheme provides for basic coverage up to a limit of US$ 16,000 (Turkish Lira 20bn) per dwelling unit – building only on a
first-loss basis. Amounts in excess can be insured with the private market. Although the
scheme is run by the Turkish government, the state does not act as a risk carrier. Liabilities
under the pool are to 100% reinsured abroad.
The following rates are applied:
Construction
type
Steel or reinforced concrete
Brick/stone
Others
Zone 1
‰
Zone 2
‰
Zone 3
‰
Zone 4
‰
Zone 5
‰
2.00
1.4
0.75
0.5
0.4
3.5
5.00
2.5
3.2
1.3
1.6
0.5
0.7
0.4
0.5
Deductible: 2% of TSI
An essential element of the scheme is that the state does not compensate earthquake losses for
risks which fall under the scheme, i.e. all legally erected residential buildings, incl. small
businesses located in such buildings. The pool does not cover illegal homes.
Disclaimer
We collect our information with utmost care on the basis of the data and statistics available to
us. Accordingly in providing our services, you acknowledge and agree that, if we or any person acting on our behalf in the performance of our obligations cannot be blamed for intent or
15
gross negligence and if no essential contractual obligation is infringed faultily, we cannot be
liable for the correctness of the information provided by us.
Furthermore we would like to emphasise that this agreement shall be governed by and construed in accordance with German law.
16
III.
Natural Disaster Insurance in Europe
Stefan Richter and Rainer Schönberger
Gesamtverband der Deutschen Versicherungswirtschaft e.V.
Table of Contents ......................................................................Error! Bookmark not defined.
Foreword .................................................................................................................................. 19
Fundamental Considerations for Natural Disaster Insurance ................................................... 19
The Volatility of Damage Events ......................................................................................... 19
Climate Change .................................................................................................................... 21
Economic Parameters ........................................................................................................... 29
Summary .............................................................................................................................. 31
Introduction to the European Models ....................................................................................... 32
Spain ......................................................................................................................................... 34
The Establishment of the Consorcio .................................................................................... 34
Structures of the Consorcio .................................................................................................. 34
Coverage for Disasters ......................................................................................................... 35
Insurance Premiums, Collection, Settlement ....................................................................... 35
Deductibles and Insurable Values ........................................................................................ 36
Summary of the Consorcio de Compensación de Seguros .................................................. 37
Graphic Representation of the Consorcio de Compensación de Seguros ............................ 38
Great Britain ............................................................................................................................. 39
Free Market Approach ......................................................................................................... 39
Insurance for Natural Disaster Claims ................................................................................. 39
Development of Natural Disaster Insurance ........................................................................ 39
Preventive Measures and Insurance Coverage for Flooding ................................................ 40
Insurance Premiums and Deductibles .................................................................................. 42
Final Analysis of the British Insurance Market ................................................................... 42
Summary of the British Insurance Market ........................................................................... 42
Graphic Overview of the British Insurance Market ............................................................. 43
17
France ....................................................................................................................................... 44
Mixed Private/Public Sector Approach ................................................................................ 44
Natural Disaster Insurance Coverage with Government Reinsurance ................................. 44
Catastrophes Naturelles ........................................................................................................ 45
Mandatory Coverage ............................................................................................................ 46
The Standard Premium ......................................................................................................... 46
Specification of Deductibles ................................................................................................ 47
Summary of the CatNat........................................................................................................ 48
Switzerland ............................................................................................................................... 50
Private Insurers and Public Monopolies............................................................................... 50
The Cantonal Building Insurers ........................................................................................... 50
The Private Insurance Industry Pool .................................................................................... 50
Insurance Coverage .............................................................................................................. 51
Premiums and Deductibles ................................................................................................... 52
Limits on Compensation ...................................................................................................... 53
Duty to Obtain Approval for Premiums ............................................................................... 53
Summary of the Swiss Model .............................................................................................. 54
Germany ................................................................................................................................... 56
Development in the Federal Republic of Germany .............................................................. 56
Development in the Former German Democratic Republic................................................. 56
Insurance Coverage for Natural Disaster Risks in the Federal Republic and the GDR ....... 57
The Deregulated Market in the Federal Republic of Germany since 1994 .......................... 57
The Introduction of ZÜRS ................................................................................................... 58
(Zoning System for Flooding [“Überschwemmung”], Backwater [“Rückstau”] and Heavy
Rains [“Starkregen”]) ........................................................................................................... 58
Natural Disaster Insurance Today ........................................................................................ 60
The Heavy Floods in August 2002 ....................................................................................... 61
Political Decision-Making Processes: 2002-2004 ................................................................ 62
Risk Potentials and Claims Burden in the Federal Republic of Germany/PML .................. 62
Private Insurance Capacity and State Guarantee .................................................................. 64
Examination of Possible Models for Compulsory Natural Disaster Insurance .................... 66
Summary Description of the Problems Involved in Compulsory Insurance ........................ 74
Notes......................................................................................................................................... 77
18
Foreword
Insuring losses due to natural disasters poses special problems for insurers, since natural
events have a very volatile character, and numerous factors affect the number and scope of
such events. The following trends have been observed in this regard:

The frequency of extreme natural events has increased.

The intensity of those events is increasing.

Signs of climate change have become apparent.

Areas which are potentially at risk currently continue to be inhabited against better
judgement.

As wealth increases, households are accumulating ever-higher values.
Changes in these parameters can have considerable effects on the medium- and long-term
stability of a natural disaster insurance model.
Therefore, the coming years will increasingly pose the question of whether the currently existing or planned natural disaster insurance concepts are equal to the new requirements and
changing factors. Preventive measures, independent provisions and the shared responsibility
of each individual insured will have to play a significant role since states and insurance companies will not be able to cover risks by themselves (making provisions must take precedence
over shifting the burden).
The following chapters will examine existing and currently discussed natural disaster insurance concepts in Europe in light of these challenges.
Fundamental Considerations for Natural Disaster Insurance
The European countries have found individual solutions for natural disaster insurance. This is
due to differences between individual countries with regard to their geographic location, the
social structure of their population and the economic and political environment. That is why it
will be very difficult to find a pan-European solution which allows for all the different circumstances of the countries or constitutes a compromise acceptable to everybody. Instead, the
natural disaster insurance system in each country must be self-sufficient, in harmony with the
various needs of the individual country and capable of meeting the central challenges cited in
the foreword on a permanent basis.
In order to be able to better assess the workability and future prospects of the individual solutions, the most important factors which are relevant to the stability of these concepts will be
described in detail below.
The Volatility of Damage Events
Natural damage events are described as volatile since their number and scope vary widely. In
insurance technical terms this is referred to as a "high standard deviation". As a result, there
are few consistencies, making these risks difficult for the insurance industry to calculate.
19
These difficulties could not be overcome even through continued evaluation of up-to-theminute environmental data. Reliable predictions of the natural damage events to be expected
in the short and medium terms will not be possible in the foreseeable future, regardless of
whether we are dealing with forecasts to assess the weather situation (e.g. floods, heavy rains)
or to evaluate tectonic movements (earthquakes)1.
Low pressure system,19 August 2002
Even the most efficient computer models are only capable of calculating reliable weather
forecasts for the next three days. If pressure conditions are stable, cautious forecasts are possible up to one week in advance. In addition, meteorologists currently can only present the
weather on a roughly regional screen. It is not possible to delimit the forecast to small localities with defined boundaries.
The degree to which natural damage events can surprise even leading meteorologists was
demonstrated by the August 2002 floods in Central Europe. On 10 August 2002, meteorologists were unable to forecast the catastrophic effects of the cold front which would move
within a few days from the Iceland-Greenland area into the Mediterranean and ultimately
cause extremely intense precipitation, including the August 2002 floods in Central Europe 2.
The complexity of the development was too much for the computer models, even with such a
brief forecast period.
In order to contend with the volatility of natural events, the insurance industry uses statistics
and its mathematical models. These are capable of calculating the probability of natural
events and loss scenarios in temporal intervals independently of daily environmental factors.
The temporal intervals are selected so that the models take into account the following special
features:
20

Several large natural disaster events can accumulate within one year or fail to appear
over a longer period.

Major inter-regional natural disaster events may occur either alone or together with local damage events.

Therefore, it remains unclear when and with what intensity natural disaster events will
occur – however, it may be assumed that they will occur.
In evaluating historical data, it has become apparent that statements cannot be made with certainty unless the temporal intervals selected are very large. Statistical studies in the German
Insurance Association (GDV) have shown that these statements generally cannot be used as a
basis for planning and calculation unless the intervals are greater than 100 years.
However, due to climate changes, the development of the global population and the habitation
of at-risk areas, even these data involve considerable uncertainty. Therefore, the data make
use of worst-case scenarios, i.e. in calculating probabilities, the worst loss scenario conceivable based on current information is normally assumed. This method ensures that the entire
range of possible developments is taken into account.
Climate Change
Of all change processes, climate change is the most difficult to integrate into the models. This
difficulty is due to the considerable progress in climate research which has been made in recent decades and will continue to be made. The results of this research, some of which serve
as the basis for worst-case scenarios, are constantly developed and modified. Therefore, the
precise dimensions of the worst-case scenario cannot be predicted with absolute certainty.
The only certainty is that there is already climate change occurring which will have a considerable impact on the number and scope of natural disaster claims.
The United Nations (UN) Intergovernmental Panel on Climate Change (IPCC) 3 has made
evaluations and investigated various scenarios on the precise course of current and future climate change. Of interest in this regard for the analysis and evaluation of natural disaster
events are the changes measured in the 20th century and the forecasts for the 21st century.

Temperature trend based on an evaluation of data for 1976-2000
The graph below shows current temperature trends calculated by researchers from measured
data for 1976 to 2000. Thus, it is not yet a model calculation for the future, but a representation of developments which have already manifested themselves in the world climate.
In its evaluation the IPCC concluded that a trend towards much higher average temperatures
has already begun, especially in Central Europe. If one examines intervals of 10 consecutive
years in this period, the data indicate an average temperature rise for the territory of the Federal Republic of Germany of +0.8°C to +1.0°C.
21

Changes in precipitation, 1900-2000
In the next graph the IPCC evaluates measured data available for 1900 to 2000 in order to
make visible changes in precipitation which have already occurred and to show any trends in
this respect.
While annual precipitation in Southern Europe declined by between 10 and 20% in the 20th
century, the situation in Central Europe has remained almost unchanged. Meanwhile, Northern Europe's annual precipitation registered a rise of up to 30%.
Thus, it should be noted that changes are becoming visible even today both with respect to the
average temperature and precipitation.
Based on these data, the IPCC set up several model calculations for the 21st century which led
to different forecasts. All forecasts of the IPCC, however, show that temperature and precipitation will, in fact, continue to change.
22

Expected change in average global temperature until 2100
The graph below shows, in an exemplary way, the results of four model calculations in a coordinate system. The most conservative of the four forecasts expects the average global temperature to rise by +1°C in the 21st century, while the most extreme scenario predicts a rise of
+4.5°C.
The range of results (Low High) is based on the use of different starting parameters with
respect to greenhouse gases and different assumptions as to the atmosphere's ability to compensate for climate changes. However, all scenarios agree insofar as they predict a rise in
temperature.
Combining the results of these models with the corresponding topographical data produces
the following:
23

Change in average global temperature based on IPCC Model A2
The model calculation A2 of the IPCC is considered to be the most reliable forecast due to its
starting parameters. The results of the model have been incorporated by climate researchers
into the world map in as much detail as possible. The colour gradations represent the degree
of climate change. The colour “blue” indicates the degree of cooling while the colour “red”
indicates the degree of warming.
The map shows that the global mean temperature will rise significantly in the 21st century for
substantial parts of the globe. This change will especially affect the Northern Hemisphere and
its polar regions. The average temperature increase in Central Europe in the next 100 years
will be between +2 °C and +4 °C. At the same time, the warming of the northern polar ice
caps and the temperature rise in Antarctica will lead to increased melting of the ice caps and a
rise in sea level.
If one compares this forecast with the data for 1976-2000 shown above, it becomes clear that
the trend observed in the 20th century will continue, even growing stronger in some respects.
As a result, it may be stated that measurements taken in recent years apparently do not reflect
merely a short-term phenomenon.
24

Change in average global precipitation based on IPCC Model A2
Model A2 provided climate researchers also with data on the change of average precipitation.
On the world map attached a decrease in average precipitation is marked by the colour
“beige” while an increase in precipitation is symbolized by green spaces.
It becomes apparent from the map that Southern Europe will receive much less precipitation
(-0.25 mm per day) and that Central Europe's precipitation situation will be largely unchanged,
while in Northern Europe precipitation will increase by +0.5 mm per day.
As temperature and precipitation increase, an increased amount of energy will be fed into the
climate cycle, resulting in more pronounced weather phenomena4. Since natural events may
take most varied forms – ranging from "land subsidence due to dryness" to "flooding due to
heavy rains” -, every country and every region, without exception, will be affected by the effects of climate changes. Heavy precipitation will lead to strong soil erosion in currently dry
areas, while climatically balanced zones on the coasts could be permanently lost due to the
rise in sea level.
25
Based on the global warming expected in the 21st
century, the IPCC assumes a sea level rise of between 40 cm and 60 cm, depending on the model.
The predicted rise means that in some regions
habitation will no longer be possible. The most
conservative model already shows that many Pacific islands (e.g. Tuvalu5) would be overflooded
and no longer be habitable.
Rise in Sea Level
In order to illustrate the effects or damage to be
expected due to a rise in sea level, the IPCC simulated a sea level rise in the Mediterranean Sea of
+0.5 m and +1.0 m, using the Nile Delta as an
example:
Even based on the conservative simulation, around 3.8 million people will lose their homes
and 1,800 km2 of crop land will be lost. If the rise is +1.0 m, these values increase to 6.1 million people and 4,000 km2 of crop land. This illustrates the damage which could result until
2100 to Europe's lower-lying regions (the Netherlands, Denmark, the German North Sea and
Baltic Sea coast etc.) and the dimensions of that threat.
The conclusions reached by climate researchers are being increasingly supported by insurer
claims data and forecasts.
Munich Re's graph shows the development of major natural damage events since 1950. This
graph shows a recognizable rise in extreme events since the 1950's, and then a clear rise since
the mid-1980's. Munich Re emphasizes that the drop-off around 2000 is merely an expression
26
of the volatility of these events and in no way represents a new trend. For Germany, this hypothesis has been confirmed in an impressive way by the August 2002 floods.
27
Number of events
The graph shows the numer of major natural damage events for each year by type of event.
Number
Flooding
Other
Earthquake, volcanic eruption
Storm
Note: The Munich Re graph only includes extreme events whose scope clearly exceeded the
resources of the affected region, i.e. events in which the regions had to rely on external, supra-national aid in order to overcome the event.
GDV has evaluated the natural damage events covered by its member companies in the territory of the Federal Republic of Germany since 1970. Unlike the aforementioned evaluation by
Munich Re, this study did not take into account regional resources, thus reflecting the actual
development in the number of natural damage events.
Number
of Elementarschäden
natural damage events
in BRD
Germany
Anzahl
der
in der
30
25
20
15
10
5
0
19
70
19
72
19
74
Storm
Stur
m
Hail
Hage
l
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
Other
(e.g.
forest
fires, winter
damage,
Sonstige
(u.a
.Wald, Winteravalanches,
Law- , frostbrände schäden
Flooding
Überschwemmung
Earthquake
Erdbeben
inen Frost)
28
20
00
,
20
02
This graph confirms the steady rise in natural damage events over the past 30 years. Storm
events in particular have shown a marked increase since the mid-1970's.
If one compares the IPCC data and insurer claims data, one can see correlations between climate changes which have been measured and the evaluations of the insurance industry. We
can therefore conclude that the climate changes measured since the mid-1970's had an impact
on the number of natural damage claims each year.
Thus, climate change is one of the major factors which must be considered in examining insurance for natural risks.
Economic Parameters
The rise in the number of claims has been accompanied by an increasing accumulation of
household wealth and growing insurance density. Thus, as the number of claims rise, economic losses and the expenditures of the insurance industry rise as well.
Munich Re obtained the following results in connection with its aforementioned study of major natural disasters:
Economic losses an losses insured with trends
The graph shows economic losses and losses insured, extrapolated to present-day figures.
The trendlines reveal the increase in losses due to natural disasters as from 1950.
US$ 170 bn
US$ bn
Economic losses (in 2003 figuress)
Thereof insured losses (in 2003 figures)
Decades’ averages of economic losses
Trend of economic losses
Trend of insured losses
29
The graph shows the extreme events described above together with the economic losses sustained as a result and the percentage of losses insured, along with the expected trend. It is
clear from this graph that damaged and destroyed assets are increasingly insured. At the same
time, there is a clear upward trend both in the extent of the losses and the percentage of insured losses.
Another evaluation by Munich Re once again points out the dimensions which this trend has
already taken on:
Decade
1950- 1960- 1970- 1980- 1990- last 10
1959 1969 1979 1989 1999 years
of
60
20
27
47
63
91
Number
events
Economic
42.7
losses
Insured losses
76.7
140.6
217.3
670.4
6.2
13.1
27.4
126.0
514.5
83.6
Comparison
of last 10
years
with 1960’s
shows dramatic rise
Last 10 ; 1960’s
2.2
6.7
13.5
Losses in US$ bn (in 2003 figures)
Once again, this examination is based on major global extreme events. Comparing the 1960's
with the last ten years once again reveals the aforementioned rise in the number of claims, in
this case by a factor of 2.2. At the same time, the economic losses caused by these events increased by a factor of 6.7 due to the accumulation of wealth by the population. Since insurance density also increased sharply and rapidly over the same period, insured losses rose from
USD 6.2 billion to USD 83.6 billion, i.e. by a factor of 13.6. Therefore, the relationship between claims expenditure and the number of insurance events is not a simple linear function,
but rather shows a disproportionate trend.
If one puts together all of this data, it becomes apparent that this trend may develop considerable momentum:

Climate change leads to an increase in extreme events.

The increase in extreme events causes an increased demand for insurance coverage
with businesses and the public.

Due to economic growth, the values insured increase steadily, including at-risk areas
(concentration of values).
Ultimately, state, society and insurers are exposed to a cycle of asset accumulation and claims
frequency.
The situation is exacerbated by the continuing trend towards habitation of areas particularly
endangered by extreme natural disaster events. Many countries continue to open fluvial plains,
coastal areas and mountains to development despite the known risks.
30
Summary
The workability of current and currently discussed natural disaster insurance systems has to
be evaluated based on their capability of mastering or controlling the following developments
and their effects:

The volatile nature of natural disaster events, i.e. the number and scope of the events
are difficult to predict through statistical means. The only certainty is that their number
and intensity will increase steadily due to climate change;

the increase in accumulation of economic wealth and in insurance density, causing
claims expenditures to rise at a faster pace than the number of claims;

the continuing trend towards habitation of potentially at-risk areas.
Therefore, all solutions for the insurance of natural disaster risks must be evaluated based on
whether their mechanisms are equal to these future developments and whether they can reconcile the interests of the public, business and the state over the long term. If that is not the
case, they will eventually prove unstable or unsustainable.
31
Introduction to the European Models
Insurance coverage for natural disaster risks has developed differently in the various countries
of the European Union for historical reasons. Not to be underestimated is the role in this development played by the

political,

economic and

actuarial structures of the Member States.
In the Federal Republic of Germany, which consisted of 11 Federal States until its reunification with the German Democratic Republic (GDR), there were numerous regional insurance
monopolies on the level of the individual Federal States. In contrast, the former GDR covered
natural disaster risks through a single national insurance monopoly. France and Spain also
opted for a standardized solution largely pre-defined by the state.
The overwhelming majority of the solutions consist of monopolistic insurance systems. These
would have had to be deregulated, i.e. opened to the free market and competition, when the
3rd EU non-life insurance Directive (92/49/EEC6) took effect in 1994. As a result, the legal
framework conditions changed for all established natural disaster insurance solutions in the
EU. The Recitals to the 3rd EU Directive state:
(1) Whereas it is necessary to complete the internal market in direct insurance other than
life assurance from the point of view both of the right of establishment and of the freedom to provide services, to make it easier for insurance undertakings with head offices
in the Community to cover risks situated within the Community;
The European Union reached the conclusion that the existing structures were inconsistent
with free market principles and the freedom to contract. Especially those insurance models
which were based on compulsory insurance had the character of a compulsory levy. This
seemed inconsistent with a free economic constitution, so that the elimination of the monopolies appeared necessary.
However, deregulation did not at all lead to the complete elimination of monopolistic structures. Only the Federal Republic of Germany opened its insurance market completely and
dispensed with the authorization of rates and policy conditions by a state supervisory authority. In contrast, France and Spain maintained the monopolistic structures in a slightly modified
form after the EU had accepted compromise proposals to this effect.
32
In Spain, for instance, only minor formal and structural changes were made in the system of
the Consorcio de Compensación de Seguros (e.g. renaming insurance premiums „levies“). In
practice, the monopolistic structures continue to exist. However, the European Union officially holds the view that, due to formal changes in the Consorcio de Compensación de Seguros,
it has no longer to be considered an insurance monopoly.
Moreover, the 3rd EU non-life insurance Directive did not only leave the previous monopolies
largely untouched, it did not lead to the formation of a homogeneous system of free marketoriented natural disaster insurance systems in the European Union either. It is true that there
were repeated attempts in the years following deregulation to examine the numerous solutions
now existing and harmonize them throughout the EU. Even the European insurance association, Comité Européen des Assurances (CEA), repeatedly confronted this problem in recent
years at the behest of the European Parliament. However, a harmonized solution could not be
found. The reasons for this failure are easy to sketch:
A harmonized European natural disaster insurance system cannot be realized because the economic, legal, social, topographical and geographical framework conditions vary widely in the
individual Member States7. In particular, these differences relate to:

Heterogeneous risk landscapes
As made clear by the issue of climate change discussed above, the difference between
the risk situations of the various countries will continue to increase. For example, the
possibility of a sea level rise poses a direct existential threat for the Netherlands, while
such a risk applies only conditionally to all other European states.

Historically different insurance solutions

Monopolistic solutions for natural disaster insurance which have been largely retained
despite deregulation in 1994 (e.g. Consorcio in Spain)

Differences in social structures, buying power and insurance density

Different degrees of preventive measures
As a result, a harmonization of natural disaster insurance will have winners and losers. As
long as this is the case, the way to an agreement will be difficult. Thus, the natural disaster
insurance systems described below are not only a reflection of political and economic developments in individual states, but also constitute specific solutions which take into account the
aforementioned special circumstances and past experience of the relevant countries.

By way of example, the existing insurance solutions of

Spain,

Great Britain,

France,

Switzerland (not a member of the EU) and

the Federal Republic of Germany

will be described below.
In respect of the Federal Republic of Germany, the current debate on the introduction of compulsory natural disaster insurance will also be examined.
33
Spain
The Establishment of the Consorcio
In Spain natural disaster coverage is offered by the Consorcio de Compensación de Seguros8
(hereinafter, Consorcio), which has its roots in the time of the Spanish Civil War.
At the end of the Spanish Civil War (1936-1939), the Spanish government intervened in the
insurance market in order to prevent the collapse of the private insurance systems. Enormous
damage was caused in the course of the war. Therefore, ways and means had to be found to
compensate residents for the losses they sustained while at the same time resolving the question of who is responsible for what damage. Thus, the object of the proposed coverage was
the solidarization of the war damage.
The total claim amount owed by the private insurance industry was calculated. Thereupon the
"Consorcio de Compensación de Riesegos de Motin" was founded and charged with distributing to residents the premiums needed in order to settle claims and financing the losses
caused by the Civil War. To this end, the Consorcio issued bonds whose repayment was
fnanced by a per cent surcharge on certain property insurance contracts (particularly fire, theft
and associated insurance).
After evaluating the experiences with the "Consorcio de Compensación de Riesegos de Motin," Spanish lawmakers reached the conclusion that government-directed compensation models are a suitable means of covering residents for extreme events. Therefore, it was easy for
the responsible policymakers to apply this principle to other damage events with an extreme
character.
Consequently, a state monopoly for disaster insurance was established in 1954, the Consorcio.
Structures of the Consorcio
From the beginning, the Consorcio offered comprehensive coverage for "disasters." To this
end, the agency was part of the Spanish Economics and Finance Ministry from its establishment in 1954 until 1990. Since 1990, the Consorcio exists as an independent public company
which, while still subordinate to the Ministry, now has greater entrepeneurial flexibility. For
example, it has maintained separate accounts since that date. The Consorcio does not have
any traditional reinsurance cover. The function of a reinsurer is perfomed by the Spanish state
as the sole risk bearer.
Since the deregulation of the European insurance market in 1994, the Consorcio is no longer
officially known as an insurer, but as a government institution which charges a "levy" in order
to finance "disasters." Ultimately, the 3rd EU non-life insurance Directive only led to formal
changes for the Consorcio.
Each building owner must pay a "levy" on his or her insurance contract, and is thus automatically “insured” against "disasters." However, owners are not prevented from obtaining supplementary private insurance coverage. For this reason, the Consorcio is not regarded by the
EU as a monopoly, since each Spanish building owner theoretically has the option of obtaining supplementary coverage of his or her own choice. In practice, however, this option is seldom exercised, since the "levy" must in any case be paid to the Consorcio, so that the building
owner would have to pay double if he or she seeks an alternative solution.
34
Coverage for Disasters
As stated above, the Consorcio offers comprehensive coverage for "disasters", which are defined as extraordinary damage events characterized by the following:

They occur only infrequently but can cause major damage.

The geographical distribution of the damage is very uneven.
The events which the Consorcio is obligated to cover have been defined precisely on the part
of the state: they include natural disasters, i.e. the risks of flooding, earthquakes, landslides,
volcanic eruptions, extraordinary tornados and meteorites. The coverage also includes political and social disasters. In particular, the following risks are listed:

natural disasters

terrorist attacks

unrest

interventions by the army and police in times of peace
The agency covers damage and injuries to

buildings,

vehicles and

persons.
Annual Report of the
Consorcio
The three latter risks reflect the aforementioned history of the Consorcio's creation, with its
roots in the Spanish Civil War.
Insurance Premiums, Collection, Settlement
The Consorcio currently charges a standardized "levy" on certain insurance contracts which is
adjusted to the consumer price index. Therefore, from the systematic point of view, the Consorcio constitutes so-called mandatory coverage since there is no other obligation to take out
insurance cover against losses due to natural disasters, independently of other insurance contracts. The "levies" are merely another term for the mandatory insurance which exists in effect.
Other than adjustment of premiums to the price level, the Consorcio has no mechanism for
meeting increased claims expenditures. This is unusual in view of the volatile nature of the
"disasters" insured. Accordingly, the claims ratio (claims as a percentage of the "levy") has
fluctuated from 0.5% in 1974 to 655% in 19839.
Until 1987 (before the premiums were renamed "levies"), premiums were calculated as a per
cent surcharge on the property insurance premium. The major premium rates were:

10% surcharge on building and movables insurance(fire, theft, glass etc.)

5% surcharge on accident insurance
35

1% surcharge on occupational insurance (occupational disability and death)
The Consorcio came to realize that this form of premium calculation basically involves problems. Through the per cent surcharges, the Consorcio's premium revenue was affected by
events which had no direct connection with disaster insurance. For example, if the media reported extensively on a large fire, thus raising demand for fire insurance, the Consorcio's revenues would rise with no direct connection to defined "disaster events"; if the number of insurance contracts decreased (e.g. as a result of terminiation), the Consorcio's revenues would
decline as well.
At the same time, those policyholders who had included numerous risks in the property insurance contract on which a surcharge was due were disadvantaged in the event of a claim. Due
to the per cent surcharge, they paid higher “levies” to the Consorcio than a comparable policyholder who had, for example, insured only the “fire” risk. However, in the event of loss,
both policyholders were treated equally with respect to compensation (concerning the object
insured in “fire”).
Therefore, the Consorcio introduced its own "levy rates" (premium rates) in 1997. These rates
are applicable for the following insurance types:

Fire insurance
 houses and office buildings: 0.092 o/oo of the insurable value
 businesses: 0.18 o/oo of the insurable value
 industrial risks: 0.25 o/oo of the insurable value

Motor vehicle (semi-) comprehensive insurance
 passenger cars: EUR 4.45 (740 Ptas) per vehicle

Other property insurance
 infrastructure: between 0.35 o/oo (motorways) and 2.0 o/oo (ports)

Accident insurance
 per person: 0.0096 o/oo
These "levies" are collected by Spain's private insurance industry in return for reimbursement
by the Consorcio. However, claims settlement is not performed through the private insurance
industry, but through the Consorcio itself which uses its own claim settlers for this.
Deductibles and Insurable Values
Deductibles are generally 10% of the claim amount. However, the deductible must be at least
EUR 150.25 (25,000 Ptas) and no more than 1% of the insured sum. In addition, deductibles
are limited to EUR 180,303.63 (30,000,000 Ptas), or 15% of the claim amount.
36
Policyholders are free to select the insurable value (replacement value, market value, automatic indexing etc.). However, the insurable value must at least be equal to the amount of the
insurable value in the underlying insurance contract (e.g. the fire insurance policy). This linkage prevents policyholders from reporting lower insurable values to the Consorcio than e.g. to
the fire insurance company. This also prevents that policyholders who believe themselves not
to be exposed to any natural disaster risks might withhold "levies" from the Consorcio.
On the other hand, policyholders do have the option of covering high-threat risks with an increased insured sum in order to receive high compensation in a "disaster event." This option is
available because, while the Consorcio has defined the minimum insurable value mentioned
above, it has not specified a maximum value. Whether or not policyholders actually choose
this option in practice cannot be evaluated at this time.
Summary of the Consorcio de Compensación de Seguros
 Despite the formal changes in the course of deregulation, the Consorcio remains the government insurance monopoly of Spain for natural disasters. This assumption is supported
by the fact that policyholders are practically refused access to private alternatives (“double
insurance” since “levy” to the Consorcio is not dispensed with). In particular, the system
does not rely on mechanisms of the private insurance industry. For example, risks are not
reinsured. Instead, the Spanish government, as the authority behind the Consorcio, must
bear all risks if the system of cross-subsidization should fail in the case of extreme losses.
The Consorcio does not set premiums based on risk or divide areas into risk zones.
 From the systematic point of view, the Consorcio does not constitute a general compulsory insurance, but mandatory coverage.
 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.
 The Consorcio offers compensation for natural disasters, as well as damage events with
political or social causes (terrorism, unrest etc.).
 The Consorcio charges "levies" for numerous property insurance contracts in the form of
"levy rates" (premium rates)
 The "levy" (insurance premium) is mandatory for buildings, building contents, vehicles
and persons.
 Standardized premium rates and deductibles apply.
 Claims settlement is performed by the public company itself. Premiums are collected by
private insurers in return for reimbursement of costs.
37
Graphic Representation of the Consorcio de Compensación de Seguros
38
Great Britain
Free Market Approach
In Great Britain, the government has intervened in the insurance market only to a very minor
extent. In this respect, a deregulated market which has been allowed to develop largely without government interference may be assumed in Great Britain.
It was only after the attacks by the Irish Republican Army in 1992 that the British government
saw the need to intervene in the insurance market. After the attacks, the private insurance industry proposed the introduction of a maximum liability of £ 100,000 per attack. This measure was intended to counteract the accumulation of risks in population centres (e.g. London).
However, the British government established the state-guaranteed "Pool Re" as a "reinsurer of
last resort", thus giving private insurance companies the financial security necessary to insure
even major risks without a maximum liability.
Insurance for Natural Disaster Claims
There is no state-guaranteed structure comparable to the "Pool Re" for natural disaster insurance. Therefore, British direct insurers, as in other sectors, depend on transferring some risks
to the reinsurance market.
Natural disaster insurance in Great Britain is generally included in building insurance coverage. Thus, it includes not only the risks of fire and storms, but also a series of other natural
disaster risks which must be insured separately in other European countries.
This is probably due to Great Britain's geographical and topographical situation, which is unfavourable for flood (especially overflowing) claims, while globally it is these very floods
which account for around 50% of losses due to natural disasters10.
Development of Natural Disaster Insurance
Since the mid-1970's, the British insurance industry has found itself increasingly confronted
with natural disaster claims. This had led to a greater emphasis on risk selection and zoning of
areas by risk class.
First, there was an increase in claims due to land subsidence caused
by dry soil or reductions in the groundwater level. As a result of the
strict risk selection practised by British insurers, insurance coverage
is no longer offered for entire regions and buildings threatened by
land subsidence are considered largely unsellable. Thus, British insurers have taken the position that they are no longer prepared to bear
the claims with a very high probability of occurrence. But this has
also the positive effect that at-risk areas are no longer inhabited and
population density in exposed regions – if possible - is declining.
pagne 2003
39
Then, in autumn of 2000, Great Britain was hit by considerable flooding, which was caused
not by overflowing, but by heavy rains. The weather services at the time reported that the autumn of 2000 had the highest precipitation in 270 years.
In 2003, a major government campaign was launched to educate homeowners about the risks
of flooding and measures to limit the damage. In a joint action, the collaboration between the
British "Environment Agency" and the private insurance industry was strengthened. The object of the Agency's collaboration with the "Association of British Insurers (ABI)" was to ensure that the overwhelming majority of building owners have the option of obtaining insurance coverage for flood risks.
To this end, the "Environment Agency" supplied insurance companies with data on the probability of flood events. Quote:
In order to assist householders and insurers in providing insurance, we have supplied
ABI member insurance companies with information that gives a national assessment of
likelihood of flooding, from rivers and the sea, within the floodplain taking into account
flood defences. It provides a first step for insurers in assessing insurance.11
The "Enviroment Agency" data were later combined with insurer claim data and time series.
Of course, these measures alone did not alter the status of the risks. Finally, in order to guarantee the insurability of the risks, a two-tiered strategy was developed involving the British
government and insurers.
Preventive Measures and Insurance Coverage for Flooding
In the spring of 2003, the British government adopted a plan calling for considerable government investment with a view to flood prevention in the period from 2003 to 2008. Under this
plan, the government will provide local authorities with an average of about £ 300 million a
year to invest in preventive measures12. All members of the Association of British Insurers
have approved this plan. Insurers, however are of the opinion that the investments in prevention promised by the British government do not go far enough to this day.
In addition, the members of the ABI have adopted a zoning model for flood risks, which establishes three flood zones based on the chance of flooding ("Categories 1-3"):

Category 1- 200 to 1 (0.5%) chance of flooding each year or less

Category 2- Between 200 to 1 (0.5%) and 75 to 1 (1.3%) chance of flooding each year

Category 3- 75 to 1 (1.3%) chance of flooding each year or greater
Category 3 risks are the most exposed. They are characterized by the current absence of plans
for protective measures (not even within the scope of the government plan), or the technical
infeasibility of such measures.
In Categories 1 and 2, the member companies of the ABI offer coverage for the consequences
of flooding to homeowners and businesses. Coverage is offered to both new and existing customers. For risks in Category 3 existing customers are guaranteed that flood coverage will be
40
continued, provided that preventive measures are taken by 2007 which reduce the probability
of occurrence of flooding to the Category 1 and 2 level.
For risks in Category 3, the insurance company reserves the right to grant coverage after reviewing the individual case. Measures are sought on case-by-case basis, sometimes with the
involvement of the Environment Agency or local authorities, in order to guarantee existing
customers that coverage will be continued. Continuation of coverage for Category 3 risks is
possible e.g. if the risk of an imminent flood can be reduced by temporary technical protective
measures so as to prevent or minimize the damage.
Many Category 3 policyholders have come to estimate their personal flood risk and present
the insurer with documentation of that risk, including documents which indicate that

the entire property is situated above known high water marks from a topographical
perspective;

the inhabited sections of the property or the sections containing valuables are situated
above known high water marks;

the homeowner or the municipality has taken increased preventive measures on their
own.
Temporary mobile flood wall Flutwände
In order to ensure that zoning data remain up-to-date, evaluations of flood events and changes
in protective measures (expansion or dismantling) are entered into the database on an annual
basis13.
41
Insurance Premiums and Deductibles
In contrast to the Spanish Consorcio, there are no standardized premium rates ("levy rates")
for natural disaster risks in the British insurance industry which is free-market-oriented, even
in the field of losses due to natural disasters. Therefore, premium rates are subject to the usual
free market conditions, i.e. each insurer calculates premiums based on claims data and management ratios. Deductibles are also determined based on actuarial principles. This system
allows, for example, policyholders to save on premiums while freeing up funds for independent preventive measures14.
Another benefit of individual premium rates and the use of deductibles is that policyholders
are encouraged to actively confront their risk situation, take measures to mitigate risks or prevent damage and to demand such measures from third parties. In monopolistic structures, in
which policyholders receive coverage regardless of the circumstances, this aspect is much less
prominent. For a Spanish homeowner, only the insurable value (insured sum) is of significance for the question of insurability and the insurance premium ("levy") amount, not the risk
situation or the preventive measures which have been taken. In the long term, therefore, the
British system allows for the development of an environment in which insurance for natural
disaster risks is accompanied by pronounced preventive measures.
Final Analysis of the British Insurance Market
A study of the British insurance market makes clear that it is necessary for the long-term stability of a natural disaster insurance policy for particularly exposed risks to be classified as
"uninsurable". This acts as a signal for both investors and homeowners having deliberately
opted for an exposed location. At the same time, incentives are created to check the insurability of one’s own risk and improve it through preventive measures.
However, combining state-subsidized flood prevention and continuation of coverage through
insurance also involves risks for policyholders. If there are delays in the provision of funds for
flood prevention, or if those funds are not available in the amount hoped or do not have the
desired effect, British insurers would be constrained to classify exposed categories once again
as “uninsurable”. The further implementation of the double strategy henceforth depends,
above all, on the readiness of the British government to invest in flood prevention.
Summary of the British Insurance Market
 The British insurance market is a deregulated market which has been allowed to develop
largely without government interference. Natural disaster coverage is offered exclusively
by the private insurance industry, which also performs all actuarial functions (concluding
contracts, collection, settlement etc.). There is no obligation to obtain insurance for natural
disaster risks.
 Direct insurers for natural disaster risks do not have a government reinsurance solution
analogous to the "Pool Re" system for terrorism claims.
42
 There are no standardized premium rates and deductibles. Instead, calculations are made
by the insurers themselves using statistical data and management ratios.
 The risk analysis of British insurers makes it difficult to obtain coverage for exposed risks.
If a risk is classified as exposed, the affected policyholders may take additional preventive
measures to improve the classification of their risk.
 The member companies of the Association of British Insurers (ABI) have worked together
with the British Environment Agency to develop a three-zone system for the flood risk
based on the chance of flooding. The development of the system is not yet completed.
 The British government has promised to invest an average of £ 300 million p.a in flood
prevention. In the view of insurers, these measures do not go far enough.
Graphic Overview of the British Insurance Market
43
France
Mixed Private/Public Sector Approach
The French state has enacted a law in 1982 providing for the coverage of natural disasters
("Catastrophes Naturelles15") by the state in cooperation with the private insurance industry.
The French model includes characteristics also to be found in the models of Spain (state) and
Great Britain (free market). Thus, the Catastrophes Naturelles constitutes an independent
approach to compulsory natural disaster insurance which partly combines the two aforementioned models.
Natural Disaster Insurance Coverage with Government Reinsurance
Insurers operating in France are obligated by law to offer natural disaster coverage at a standard rate defined by the French government.
At the same time, insurers are given the option of purchasing reinsurance coverage for the
risks in their respective portfolios from the government reinsurance agency, the "Caisse Centrale de Réassurance (CCR)." Of course, insurers also have the option of obtaining reinsurance coverage on the free market. However, it should be noted that the reinsurance coverage
offered by the Caisse Centrale de Réassurance differs substantially from the reinsurance
available on the free market:

The French government provides the CCR with an unlimited financial guarantee for
the event that its funds are not enough to cover an extreme event. Therefore, the CCR
has almost unlimited liability, limited only by the liquidity of the French government.

The CCR offers insurers two basic versions of reinsurance coverage:
-
In Variant 1, the agency concludes proportional reinsurance contracts, i.e. in return
for a percentage of premiums, the CCR assumes an equal percentage of claims. Insurers must transfer at least 40% of premiums to the CCR. Until 1996 reinsurance
coverage was limited to 90% of the premium. Since 1997, a maximum limit of
40% for industrial risks and of 60% for all other risks applies.
-
Variant 2 offers insurers stop-loss coverage: the CCR assumes all claim payments
each year which exceed a factor of x times the annual premium volume of the direct insurer in ceded business. The factor can be negotiated for each individual
case.
In order to prevent insurers from only selecting stop-loss coverage with Variant 2 in order to
cover exposed risks, Variant 2 may only be selected if the insurer also chooses Variant 1, i.e.
purchasing simple proportional reinsurance from the CCR, and reinsures its entire portfolio
with the CCR. The CCR's stop-loss coverage in particular is meant to enable insurers to take
on even exposed risks. Thus, insurers are able to cover risks also in the event of unfavourable
claims ratios, a changing reinsurance market or stricter solvency requirements.
However, the system has had to contend with considerable structural problems since its implementation.
44
After its establishment, the CCR had to rapidly accumulate capital to cover disaster events
while at the same time competing with private reinsurers. To this end, it initially offered reinsurance coverage at extraordinarily low prices. As a result of this, direct insurers founded
(foreign) subsidiaries which underwrite exclusively highly exposed risks and then reinsured
their entire portfolio at low prices with the CCR. The good risks remained with the parent
companies and the private reinsurance market. An aggravating aspect was that the CCR had to
provide compensation for a severe loss (storm and flood) already in the year of its foundation.
Therefore, the CCR’s reserves were less than 153 million EUR (one billion francs) in 1996.
To achieve an improved result, reinsurance contracts were modified by the CCR in 1996. The
portfolio share which direct insurers may reinsure when making use of Variant 1 was limited
to 60% (instead of 90%) of claims. In addition, in Variant 2, direct insurers were required to
pay a deductible corresponding to no less than the gross annual premium volume of the insurer's natural disaster segment. Only then it was possible to make use of Varant 2 (stop-loss
contract) reinsurance cover.
These regulations are even stricter for very heavy risks (e.g. industrial risks). Variant 1 was
limited to 40% of claims and the deductible in Variant 2 was raised to 300% of the gross annual premium volume in the insurer's natural disaster segment. In addition, insurers, which
had very much benefited from the old system, must now accept individual deductibles derived
from the (largely negative) ratio between premiums and claim volume.
Since even these regulations failed to stabilize the system in lasting fashion, standard premiums for natural disaster coverage were finally raised by decree in 2000.
The numerous government interventions raise the question whether the system in its present
design is now stable by itself in lasting fashion. For example, it is still unclear what measures
French insurers will take if both the number and the intensity of natural damage events continue to increase. A changed underwriting policy of direct insurers might require further intervention of the French government in the future in order to ensure the continued existence of
the CatNat.
Catastrophes Naturelles
While the Spanish law on the Consorcio describes very precisely what damage events are to
be considered natural disasters, the French regulations on Catastrophes Naturelles leave this
question largely unanswered. As a result, the French government must decide after each natural disaster event whether the law applies. To this end, a commission has been created consisting of representatives from the Ministries of the Interior, Economics and the Environment. In
order to determine whether a specific event qualifies as a "natural disaster" within the meaning of the Catastrophes Naturelles, the mayor of the affected municipality or the prefect of
the affected Département must submit all documents necessary for an assessment of the situation to this commission.
In principle, the commission concentrates on risks generally covered by natural disaster insurance. However, the line between an extraordinary local damage event and an actual disaster
can be difficult to pin down. In addition, there are routine political factors which affect the
commission's decision-making process. Therefore, in case of doubt, the law on Catastrophes
Naturelles may be applied even in cases which do not fall under the actual protective purpose
of disaster insurance. The use of insurance premiums is therefore also subject to political influences, so that the economic compensation by the system to be expected is difficult to evaluate.
45
Mandatory Coverage
The 1982 law on Catastrophes Naturelles specifies that all assets, i.e. including land vehicles
insured against “fire” risks, "other damage" or “loss of business”, must automatically be insured against the impact of nature-related risks as well (including storms). In other words,
France has opted for mandatory coverage, i.e. insurance for nature-related risks is linked to
the respective underlying insurance contract. Thus, French policyholders are obligated to obtain insurance for natural disasters as soon as they e.g. acquire a fire insurance policy. Policyholders are not permitted to waive natural disaster coverage in such a case, and insurers are
obligated to offer and underwrite coverage for natural disasters. If French policyholders do
not desire coverage for natural disasters, their only option is to waive property insurance coverage (in the aforementioned example of fire insurance) entirely.
This system ultimately induced insurers to unwillingly eliminate negative risks. By linking
natural disaster coverage with the unerlying property insurance coverage, insurers were forced
to raise basic premiums for bad risks until potential policyholders lost their interest in insurance coverage for financial reasons. In addition, insurers withdrew completely from especially
at-risk areas in order to avoid having to submit an offer in the first place. Some companies
operating on a national basis, which could not simply withdraw from certain areas, established subsidiaries which accumulated the negative risks and transferred them wholesale to
the state-run CCR.
Thus, despite the attraction of an unlimited state guarantee and low premiums from the government reinsurer CCR, the CCR was not able to strengthen and expand its economic position.
On the contrary: the state guarantee and low-price reinsurance coverage only led to the accumulation of bad risks with the CCR, while good risks were covered at even lower prices than
before on the free reinsurance market.
The Standard Premium
Except for the "storm" risk, the CatNat premium rates are set by government ordinance. Thus,
the standard premium principle applies in the form of a percentage of the basic premium (e.g.
the fire policy premium). This system also involves cross-subsidization between different
customer groups, since highly exposed risks cause higher claims due to their exposure and
therefore require higher compensation.
The CatNat premium rates are currently as follows:


Land vehicles
-
6% of the theft or fire insurance premium or
-
0.5% of the premium for other property insurance
All other assets
-
12% of the premium of the underlying contract
46
Clearly, CatNat's founders underestimated the claims potential due to natural disasters and the
entrepreneurial flexibility of French insurers in handling the insurance system implemented
by the state (e.g. by founding subsidiaries). As a result, CatNat raised its premiums for "other
assets" from 5.5% in 1982 to 9% (1986-2000), and then to 12% in 2000, in order to guarantee
CatNat's long-term financing.
Moreover, the system of using a percentage of property insurance premiums as premiums for
natural disaster coverage has several weaknesses:

Cross-subsidized systems can only remain effective over the long term if comprehensive insurance density is achieved and risks of most different quality are covered.
However, the CCR is used by direct insurers preferably to reinsure exposed risks.
Good risks are insured in the free reinsurance market. In this respect, risk selection is
facilitated for direct insurers by the fact that the CatNat premium, in percentage terms,
depends on the basic premium in property insurance. Since the basic premium is not
subject to any government regulation, it may be increased to such an extent that policyholders facing exposed risks can no longer pay for natural disaster coverage. This
mechanism constitutes a potential danger for the French system. It was for this reason
that the Spanish Consorcio introduced “premium rates” which are based exclusively
on insurable value and may therefore be calculated and charged independently of the
basic premium.

Policyholders seeking comprehensive coverage (thus raising the basic premium of
their property insurance contract e.g. by including additional risks) pay disproportionately high premiums into CatNat without enjoying more comprehensive effective coverage. With equal insured sums and risk situations, a policyholder insuring only the
"fire" risk will receive the same CatNat benefits as his neighbour who has included the
“pipe water damage” risk in his contract in addition to fire.
However, there is no apparent effort at this time to switch from a percentage approach to calculation of premiums based on separate premium rates.
Specification of Deductibles
Insurance for Catastrophes Naturelles provides for deductibles to be borne by policyholders.
Both the type and the level of the deductibles are centrally regulated by the French government.
The franchise deductibles listed below currently apply, each per contract and per event:

Building contents and non-commercial buildings (buildings with private use)
-

Company buildings (buildings for commercial or industrial use)
-

EUR 380.00
10% of claims expenditure, though no less than EUR 1,140.00
Loss of business (business interruption)
-
Temporary deductible for three workdays, or EUR 1,140.00
47
Higher deductibles may be agreed upon for buildings for commercial use and also as part of
loss of business insurance coverage. This, however, applies only if such higher deductibles
are specified in the underlying insurance contract. Therefore, the CatNat franchise cannot be
raised entirely independent of the deductible of the underlying contract. A "buyback" of franchises, i.e. reduction of the deductible in return for higher premiums, is not permitted. This is
meant to ensure that the concepts of independent responsibility and prevention are not glossed
over.
Summary of the CatNat
 The CatNat system has proven unstable since its establishment. The reasons for this instability basically include

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, only succeeded in accumulating exposed risks,
thus destabilizing the system of comprehensive cross-subsidies and the model as a
whole.
 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.
 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.
 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 CCR solvent.
48
Graphic Overview of the CatNat
49
Switzerland
Private Insurers and Public Monopolies
There is no standardized 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 in others, the private insurance industry offers such coverage.
Thus, Switzerland is a country with two natural disaster insurance systems existing independently of each other, with only one of the two systems being applied in each individual
Canton.
This “duality of systems” is due to the fact that the elimination of monopolies had been made
conditional on the result of a popular referendum held at Canton level. Residents in 7 of 26
Cantons ultimately opted for the private insurance industry. In the remaining 19 Cantons, the
vote of residents turned out in favour of cantonal building insurers who retain their monopoly
there.
The Cantonal Building Insurers
In 19 of 26 Swiss Cantons, policyholders are obligated to purchase insurance coverage for
buildings from the cantonal monopoly16. This system has been in effect in some Cantons
since the early 19th century.
The Private Insurance Industry Pool
In the other 7 Cantons (Geneva, Uri, Schwyz, Tessin, Appenzell Innerrhoden, Wallis, Obwalden and the Duchy of Liechtenstein), only the private insurance industry offers natural disaster coverage. This option has only been available to Swiss residents since the respective popular referendums around 10 years ago.
The introduction of private natural disaster coverage is the expression of a discussion about
the pros and cons of monopoly coverage held in the early 1990's both in the member states of
the European Union and in Switzerland.
This discussion was triggered by the general deregulation of the Swiss insurance market in
1993. In that year, Switzerland adopted the EU Directives on the freedom of establishment for
insurers, as well as EU regulations on the solvency of insurance companies, to a large extent.
At the same time, the Swiss government repealed the duty to obtain approval for rates and
terms and conditions of business almost entirely17.
Since the beginning of the deregulation efforts, there were far-reaching disucssions on the
building and natural disaster insurance segment. In particular, the advocates of deregulation
argued that satisfactory coverage of buildings for fire and natural disaster risks can be ensured
by the private insurance industry as well. It was further argued that building insurance repre-
50
sents a typical market without any special mechanisms, so that monopolistic structures, supported by interference by the state, are not needed.
In order to master the financial aspects of natural disaster insurance, the private Swiss insurance companies established a pool for natural disaster insurance, with the pool functioning
merely as a clearing house and distributor of risks. Each insurer assigns 85% of its claims
(claim expenditures) for the natural disaster risk to the pool, with 15% remaining with the
company. Natural disaster insurance premiums are not transferred to the pool. The pool then
distributes the claims expenditure for the assigned claims in proportion to the respective premium revenue from natural disaster insurance to its members. For this reason, the transfer
(assignment) of premium revenues to the pool (claim pool) is not necessary.
The Swiss Natural Disaster Claim Pool is a mechanism which helps companies solve two
problems:

First, smaller companies are not burdened beyond their business capacity, since the
distribution rate depends on premium revenues.

Second, the problem of positive or negative risk selection is solved. The distribution
of claims expenditures produces a mixture of different risks which, by its nature, includes both simple and exposed risks. Therefore, individual insurers basically bear the
average claims expenditure of all risks independently of their underwriting policy.
Insurance Coverage
Swiss homeowners are obligated to insure themselves against fire and natural disaster claims
either with public or private insurers, depending on the Canton. Therefore, it is a combination
of building and compulsory natural disaster insurance. The compensation is based on insurance at the replacement value: the disbursement equals the amount necessary in order to construct a new building of the same type and quality.
Due to Switzerland's geographic location in the Alps, the natural disaster coverage covers not
only the usual risks such as flooding, but also events like storm and hail, avalanches, snow
pressure, landslides and rock slides.
Not included in the natural disaster coverage is the risk of earthquakes. Both the cantonal building insurers and the private insurance industry have established
separate independent pool systems for this risk providing funds
for earthquake claims:
51

The cantonal building insurers established the "Swiss Pool for Earthquake Coverage"
for this risk.

The 24 private insurance companies combined to form the "Community of Interests
for the Coverage of Earthquake Claims."
Premiums and Deductibles
The cantonal building insurers and private insurers charge their policyholders different premiums for natural disaster coverage, with the cantonal building insurers offering insurance
coverage at about half the rate offered by private insurers. This advantage is possibly based on
the high reserves accumulated in the past by cantonal insurers18.
Consequently, one cannot conclude from this proportion that the private insurance industry
requires twice the premium for the same compensation. Private insurers have operated in the
market only for a few years, i.e. companies have not been able during this short period to
build up a sufficient reserve for extreme events. Thus, the additional premium serves to accumulate these reserves. Therefore, in the medium term, the proportion between the premiums of insurance monopolies and those of the private insurance industry will change as soon
as the reserves of the private insurance industry can be extended. However, until then the
market will be clearly distorted by the lead of insurance monopolies.
Other factors influencing premium calculation are the solvency and long-term stability of the
private insurance industry. For the private insurance industry there is a need to react to future
developments, particularly climate changes, in a risk-appropriate manner. Switzerland will
face particularly extensive natural disaster risks in the future due to the warming of its permafrost soil19. In addition to an increased number of landslides and rock slides, an increase in the
number of floods is expected for the future.
Whether, in addition to that, premium calculation by cantonal building insurers will be influenced by reserves due to subsidization of premiums cannot be evaluated here. However, monopolies will be aware of the fact as well that, if such a procedure is followed, the predicted
course of natural disaster claims will ultimately exhaust its reserves unless the cantonal building insurers correspondingly adjust their premiums.
The following premiums are currently charged:

For rating, members of the private insurance industry pool use a standard rate. This
rate currently amounts to about 107 centimes (0.70 EUR20) per 1,000 francs insured.

Cantonal building insurers charge about 63 centimes (0.41 EUR) per 1,000 francs insured for comparable insurance coverage.
The deductibles of both systems must be based on Article 4 of the Swiss Natural Disaster Ordinance. Thus, there is state interference with the market with respect to deductibles. The
Natural Disaster Ordinance provides for the following building insurance franchises:

buildings serving exclusively residential or agricultural purposes: 10 per cent of the
compensation, though no less than 200 francs and no more than 2000 francs;

buildings serving all other purposes: 10 per cent of the compensation, though no less
than 500 francs and no more than 10,000 francs.
52
Deductibles apply only once per event – irrespective of the number of objects insured - for
equipment and building insurance. If an event involves multiple buildings of a single policyholder with different deductibles, the deductible must be no less than 500 francs and no more
than 10 000 francs (overall, i.e. for the total of building damage).
For earthquake claims, the franchise of the Swiss pool for earthquake coverage equals 10% of
the insured sum, though no less than 50,000.00 francs. In contrast, the private-sector "Community of Interests for the Coverage of Earthquake Claims" fixes the franchise at 10%, at
least 5,000.00 francs, depending on the amount of loss established.
Limits on Compensation
The Swiss Natural Disaster Ordinance21 provides for a limit on compensation in each damage
event. This limit amounts to 25 million francs per policyholder and 250 million francs per
damage event. Article 5 of the Natural Disaster Ordinance states as follows in this regard:
“Article 5 Limits on Liability
1. The following limits on liability shall apply, whereby compensation for movables and
building damage shall not be combined:
a. If the compensation due to an individual policyholder for a single insured event determined
by all insurance institutions authorized to operate in Switzerland exceeds 25 million francs,
the compensation shall be reduced to that amount.1 This amount shall be subject to further
reduction in accordance with b below.
b.2 If the compensation for an insured event in Switzerland determined by all insurance institutions authorized to operate in Switzerland exceeds 250 million francs, the compensaion due
to each individual claimant shall be reduced so that the total does not exceed this number.
2. Temporally and spatially distinct damage events shall constitute a single event if they can
be ascribed to the same atmospheric or tectonic cause."
These provisions make clear that, while the Swiss system offers insurance coverage for natural disaster risks, it is not able to offer full compensation for actual and insured damage in
case of extreme events. In major damage events, there will in any case be an apportionment of
the compensation which is not enough to cover the full amount of the policyholder's individual claim. This situation is satisfactory neither for policyholders nor for the insurance industry
in view of future developments. However, it is to be assumed that - as reserves increase - the
maximum compensation will be raised.
Duty to Obtain Approval for Premiums
Although the Swiss insurance market has been largely deregulated, private-sector natural disaster insurance premiums must be submitted to the Federal Office for Private Insurance (BPV)
for approval pursuant to Article 6 of the Swiss Natural Disaster Ordinance. Article 6(3) of that
Ordinance states as follows in this regard:
"Insurance institutions shall submit premium rates to the BPV, including the method of calculation. The BPV shall approve the rates if they are appropriate for the risks and costs. The
53
applicable premium shall be indicated in the policy vis-a-vis insured persons separately and
by amount"
Summary of the Swiss Model
 Although the Swiss natural disaster insurance market is deregulated by law, the private
insurance industry may only offer natural disaster coverage in 7 of 26 Cantons due to the
system of popular referendums. Therefore, cantonal monopolies and the private insurance
industry are indirectly competing for the more efficient system despite the regional (cantonal) separation.
 Each building owner is obligated to insure himself not only against the usual risks (fire,
storm, hail), but also against natural disaster risks (flooding, avalanches, snow pressure,
landslides, rock slides).
 Risks are balanced within the private insurance industry through the pool of private insurers. Companies assign 85% of their natural disaster claim expenses to the pool, which distributes the claims burden to all pool members in proportion to the premium revenue of
the relevant company.
 The cantonal building insurers are currently able to offer coverage for natural disaster
risks at half the price offered by private insurers. This advantage is based most probably
on the extensive financial reserves accumulated by the cantonal insurers in the past, reserves which are not available to the private insurance industry to the same degree. In addition, private insurers are subject to standard international solvency requirements. The
capital costs involved in compliance with these regulations and the costs of reinsurance
are reflected in premium calculation.
 Liability per policyholder is limited to CHF 25 million per natural disaster insurance event
and CHF 250 million overall. These limits apply for both private insurance and the cantonal monopolies. Due to the limit of liability to CHF 250 million the Swiss system cannot
be classified as a comprehensive insurance solution for natural disaster claims, since policyholders will have to bear some of the burden themselves in cases of doubt.
 Private-sector natural disaster insurance premiums still require approval by the Swiss Federal Office for Private Insurance. Therefore, the market is not completely deregulated in
Cantons without cantonal building insuers.
54
Graphic Overview of the Swiss Model
55
Germany
Development in the Federal Republic of Germany
In the Federal Republic of Germany a two-tiered property insurance system, with both monopolies and private insurance companies, had developed. Until the mid-1990's, the Federal
Supervisory Office for Insurance supervised policy conditions also in property insurance, with
a few exceptions.
Until the market was deregulated on 1 July 1994, there were insurance monopolies in some
regions of Germany which covered the building insurance segment (insured risks: fire, often
storm, sometimes natural disasters). These insurance monopolies existed even before the establishment of the Federal Republic of Germany, some as early as 1676 (Hamburger Feuerkasse). During several centuries, building insurance was compulsory and a monopoly, i.e. all
buildings, with few exceptions, had to be insured with the regional insurance monopoly.
Building owners were neither allowed to choose the insurer, nor were they allowed the fundamental decision of whether to obtain insurance coverage or not. Only in those regions
where there was no monopoly or where it had been abolished in the course of years insurers
subject to competition were able to offer building insurance policies.
Due to the Third EU non-life insurance Directive and subsequent deregulation of the market
in 1994, monopoly insurance contracts were transformed into private insurance contracts
through a "Transitional Law." Under this law, policyholders had the option of terminating
their building insurance policies with the monopolies and obtaining the coverage of their
choice from private insurers.
As a result, in some regions, the private insurance industry was not able to offer insurance
products to cover fire-building risks and, in some cases, natural disaster-building risks, until 1
July 1994.
Development in the Former German Democratic Republic
In the former GDR, the United Insurance Agency of Greater Berlin was established in 1950,
later transformed into the national insurance agency of the GDR.
The national insurance agency offered all property insurance classes, except for losses compensated by other mechanisms of the socialist system.
Upon the reunification of the two Germanies in 1990, government
insurance contracts were transferred to the private insurance industry. Claims asserted prior to reunification which had not yet
lapsed are settled by the GDR state insurance agency, under the
supervision of the Federal Finance Ministry22.
56
Insurance Coverage for Natural Disaster Risks in the Federal Republic and the GDR
The GDR's national insurance offered comprehensive coverage for natural disaster risks, particularly flood risks, in building and content insurance policies.
Of the insurance monopolies of the Federal Republic of Germany, only Badische
Gebäudeversicherung and Württembergische Gebäudeversicherung in the Federal State of
Baden-Württemberg offered comprehensive coverage for natural disaster risks in addition to
fire risks. This coverage included the storm, hail, flooding, avalanches, snow pressure, landslide and earthquake risks. The other insurance monopolies offered insurance coverage only
for storm and hail, but no insurance coverage for other natural disaster risks.
In 1991, i.e. three years prior to complete deregulation of the German insurance market, the
private insurance industry was allowed to offer insurance coverage in the natural disaster insurance segment. With the approval by the Federal Supervisory Office for Insurance (BAV)
of the "Special Terms and Conditions for the Insurance of Additional Natural Disaster Risks"
the private insurance industry was able to include natural disaster risks in its insurance offer.
The Terms and Conditions approved in 1991 spoke expressly of "additional" natural disaster
risks, since insurers subject to competition were allowed to offer cover of, for example, the
"storm" and “hail” risks even in those areas where there were still monopolies for buildingfire insurance at that point, provided they were not included in building-fire insurance, which
was the case with some monopolies. Therefore, the Special Terms and Conditions of the private insurance industry only covered the following risks:

Flooding (including heavy rains, pressurized water and backwater)

Earthquakes, land subsidence, landslides

Snow pressure, avalanches

Volcanic eruptions
With deregulation in 1994, all limitations of risks were eliminated, and the private insurance
industry was, for example, allowed to insure buildings for the “storm” risk as well, even in
those regions where this had exceptionally not been permitted before.
The Deregulated Market in the Federal Republic of Germany since 1994
In the summer of 1997, there was a major flood in
the Federal State of Brandenburg (Oderbruch).
Only an extensive response prevented the dams
from giving way, flooding the entire valley west
of the Oder River. As a result of this event, the
private insurance industry conducted a more detailed geological and statistical analysis of flooding risks in Germany, taking into account the results of the analysis by introducing a zoning sys-
57
tem.
Different risk situations in the German territory with regard to natural disaster risks results in
a division into risk classes (zones) to allow for the fact that the probability of individual risks
varies. The division into zones formed the basis for setting up a risk-appropriate rating system
of indvidual insurance companies. For the “storm” risk there has been such a zoning system
for some time already..
The necessity of such zones can be explained by the following example: a policyholder residing in the heights of the low mountain ranges is threatened less by floods than by the risk of
storms and earthquakes. By the same token, the flood risk of a policyholder residing in the
Old City of Cologne situated on the Rhine, which is routinely threatened by flooding, must be
assessed as higher. A zoning system which takes into account the exposure of the region concerned and the respective risk leads, in actuarial terms, to the calculation of premiums based
on risk.
http://www.bund-berlin.de/projekte/oder/images/deichbruch_gr.gif
The Introduction of ZÜRS23
(Zoning System for Flooding [“Überschwemmung”], Backwater [“Rückstau”] and Heavy
Rains [“Starkregen”])
The roots of ZÜRS go back to an initiative by two insurance companies, which first had the
idea of a zoning system for flood risks which would be limited to the territory of Bavaria.
After the Oder floods, this plan was taken up and, with the help of GDV, developed into a
system encompassing all of Germany. Contrary to its name “ZÜRS”, the system currently
includes only data on the flood risk, the risks of backwater and heavy rains have not yet been
implemented.
The ZÜRS system consists in essence of a
database showing on the basis of address
data (road networks, house numbers, etc.)
the risk of a flood for the area inquired about.
The flood zones have first been calculated
based on altitude models and finally professionally reconciled with actual data of the
water management offices. In a later stage,
flood scenarios were simulated on a computer. In the further course of work the results
achieved were reconciled with actual claims
data and aerial views of past floods. The
ZÜRS area profile encompasses rivers with a
total length of around 55,000 km, including
the position of dikes and other protective
facilities.
The ZÜRS river network
58
Simulation with only elevation profiles
Simulation with elevation profiles and dikes
As a result of these efforts, the country was divided into three, since 2004, four flood zones:
the division was based on the probability of a flood occuring in a specific period.
The chance of flooding is as follows:

Zone 1: one event in 200 or more
years

Zone 2: one event in 50-200
years

Zone 3: one event in 10-50 years

Zone 4: one event in less than 10
years

The software includes three central elements, or "modules": the
ZÜRS Viewer (visualization of areas) as
well as the “Black Box" and
"ZÜRS light” for automatic assignment
of risk classes to address data.
59
ZÜRS Software (Viewer)
Insurance companies may, based on the ZÜRS software provided by GDV, automatically
assign individual risk addresses and address databases to zones. Thus, they are able to estimate flood risks in a qualified way. The software has been regularly updated since its initial
delivery.
Natural Disaster Insurance Today
Many insurance companies offer coverage for the natural disaster risks cited in the 1991
"Special Terms and Conditions" (see above). The "storm" risk is insured in nearly all cases,
since a high market density has already been attained through building insurance policies.
The overwhelming majority of insurers use the ZÜRS software to estimate the flood risk. If
there are objective reasons for an on-site inspection (e.g. due to divergent data of the policyholder), this is usually carried out for final evaluation of the risk.
Flood coverage can be obtained today for about 90% of areas. The problem areas are mostly
those which have been inhabited for centuries due to their advantageous situation next to waterways. Even today potentially at-risk areas are still inhabited. In such cases each policyholder must decide for himself what value he attaches e.g. to land or a house located right
next to a river bank.
There are no generally applicable premiums and deductibles in natural disaster insurance. The
German insurance market does not have (government-ordered) standard premiums or predefined deductibles.
By way of example, we will mention the coverage offered by two major German insurers for
the following natural disaster risks: flooding (due to precipitation and/or rivers overflowing),
backwater, subsidence, landslides, snow pressure, avalanches and volcanic eruptions as an
additional component of comprehensive insurance on buildings.
Insurer 1
The deductible for earthquakes is 2.5% of the insured sum; for all other risks,
the deductible is 10% of the compensation due, though no less than EUR 500
and no more than EUR 5,000.
Insurer 2
The deductible for natural disaster risks is 10% of the claim amount per claim
event, though no less than EUR 250 and no more than EUR 5,000. A different
deductible is not provided for the earthquake risk.
Premiums for an average risk (single-family house, no flat roof, 150 m2 of residential space)
begin at about EUR 300.00 p.a. for comprehensive insurance on buildings for the following
risks: fire, lightning, explosion, pipe water, storm/hail and natural disasters.
Coverage is generally provided at the building's sliding replacement value. Thus, the insured
sum is automatically adjusted to the price trend. Underinsurance cannot arise, provided the
insured sum is correctly determined upon conclusion of the contract. Fixed insured sums or
insurance at current value are only possible in exceptional cases.
60
The Heavy Floods in August 2002
In August 2002, Central Europe was hit by
sustained heavy rainfall. This precipitation
was concentrated especially in the smaller
tributaries of the low mountain ranges, causing considerable damage in those areas in
the form of torrents (water, sludge and debris). Due to the extensive area and quantity
of precipitation, the Elbe, Moldau and Danube Rivers ultimately overflowed, causing
considerable damage24.
Affected area
Affected towns and cities
River affected by high
water
The 2002 Floods
The economic damage came to EUR 9.1
billion in Germany alone. All economic
sectors were affected by the floods, as well
as government infrastructure facilities. In
addition, environmental damage resulted as
numerous gas and industrial facilities were
flooded, causing harmful substances to be
discharged into the water (e.g. fuel oil, industrial raw materials, fertilizers, etc.).
With respect to the insurance coverage for the households and businesses affected by the
floods, the situation varied:

Some policyholders had no coverage for natural disaster risks, even though this coverage was offered by the insurance industry. This mostly concerned policyholders in the
so-called “old Federal States” (States of the Federal Republic of Germany before reunification in 1990).

Many private policyholders in the so-called “new Federal States” (area of the former
GDR) still had coverage for natural disaster risks through unchanged policies which
had been taken over from the former GDR state insurance agency and continued by the
private insurance industry.

In addition, some commercial and industrial property insurance contracts covered
flooding damage provided this coverage was included in the relevant policy conditions
(e.g. in construction performance insurance, all risks concepts).
Those policyholders who had no coverage for natural disaster risks were uninsured almost
exclusively by their own choice since they had not seen the need for such coverage.
At the time of the August 2002 floods, only 5% of buildings and 10% of building contents in
Germany were covered by natural disaster insurance. The weak demand of many residents
was favoured by the fact that the government had routinely provided aid for reconstruction in
past disasters. In fact, this assistance was reduced by the authorities if the person affected
could expect compensation from an insurance policy. Thus, many residents set their hopes on
future government aid. Consequently, demand for insurance coverage continued to be rather
weak. Moreover, government aid did not promote the extension of independent preventive
measures.
61
Political Decision-Making Processes: 2002-2004
Because of this problem and in view of the high losses sustained, politicians resumed the debate about whether compulsory insurance should be introduced for natural disaster risks.
"Compulsory insurance" was generally understood to mean a model according to which owners of certain buildings are obligated to insure these against the risks named in the law. For
example, the Federal Republic of Germany has the Compulsory Insurance Act, which states
that the keeper of a motor vehcile must obtain liability insurance as soon as the vehicle is registered and is used in traffic.
The Federal Ministries of Finance and Justice, as well as the Minister-Presidents and Finance
Ministers of the Federal States, approached the German Insurance Association25 (GDV) and
requested the review of actuarial solutions for compulsory natural disaster insurance based on
risk-adequate premiums. According to the ideas of policymakers, any cross-subsidization of
risks was to be avoided. Subsequently, various specifications were made on the part of policymakers concerning buildings and risks to be insured and with regard to deductibles and
rating models, on which GDV based its work.
Thereupon, GDV took the following steps:

First, reliable data on insurable values and claims potential had to be established for
the territory of the Federal Republic of Germany, which formed the basis of all further
scenarios. This included establishing the risk potential for the risks of “storm“, “flooding“ and “earthquakes” as well as the calculation of the claims burden to be expected
at certain intervals. In doing so, scenarios were assumed which took into account also
the probable maximum loss. Details on this can be found in the Section entitled “Risk
Potential and Claims Burden in the Federal Republic of Germany/PML”.

In the next step the claims burden established was compared with the capacity available for direct insurers and reinsurers in the segment of natural damage events. It was
ascertained that the capacity of the insurance industry is insufficient to offset the
claims burden p.a. established. Consequently, solutions had to be found to fill the financial gap between claims burden p.a. and capacity. Further details on this may be
found in the Section entitled “Private insurance capacity and state guarantee”.

In further analysis, GDV first dealt with the question whether there should be a general duty to obtain insurance for all risks or whether, instead, it should only be required
to automatically take out natural disaster insurance when concluding certain insurance
contracts (so-called mandatory coverage). Finally, two models were analyzed, in compliance with political specifications, as to their workability in practical implementation
of natural disaster insurance. The Section entitled “Possible Models for Natural Disaster Insurance” expands on these points.
Risk Potentials and Claims Burden in the Federal Republic of Germany/PML
Calculation of the insured sum relevant for the model
The total insured sum of relevance for the models, established according to political specifications, comes out to around EUR 8.5 trillion. This figure results from the entire portfolio of fire
insurance policies (existing almost across-the-board) for residential buildings and smaller
62
commercial buildings with an insured sum of up to EUR 5 million, based in each case on replacement value coverage26.
The regulatory framework imposed by political bodies provided that the following insurance
types should not be included in the total insured sum: building content insurance, business
interruption insurance, industrial property insurance and public infrastructure insurance.
Calculation of Risk Potentials
Risk potentials based on time series show the claim amounts which must be expected for a
defined period in case of an extraordinary damage event. The models calculated the following
risk potentials for periods of 200 and 300 years (referring to recurrence periods of any damage
event):
 Risk potentials for the "storm" risk

Rate of occurrence: 200 years
EUR 8.0 billion

Rate of occurrence: 300 years
EUR 11.0 billion
 Risk potentials for the "flooding" risk

Rate of occurrence: 200 years
EUR 9.0 billion

Rate of occurrence: 300 years
EUR 11.0 billion
 Risk potentials for the "earthquake" risk

Rate of occurrence: 200 years
EUR 7.0 billion

Rate of occurrence: 300 years
EUR 11.0 billion
No statements can be made to policymakers on the risk of storm tides since the database for
such models is not yet sufficient. The potential for each of the other natural disaster risks
(snow pressure, land subsidence, avalanches, volcanic eruptions) is under EUR one billion p.a.
in the above analysis.
Finally, the natural disaster risks storm, flooding (backwater, heavy rains), earthquake, land
subsidence, volcanic eruptions, avalanches and snow pressure were included in the fundamental considerations. The storm tide risk could not be included based on the reasons cited above,
although GDV intends to continue studies in this direction.
Cumulative Risks and Probable Maximum Loss (PML)
“Rate of occurrence” means the recurrence period of any damage event to be expected. Taking the example of the “earthquake” risk this means that a claim in the amount of EUR 11
billion will occur once within a period of 300 years. However, it cannot be predicted at what
time this event will actually occur. Thus, the above-mentioned EUR 11 billion do not represent the entire claims burden of a period of 300 years. Total claims expenditure over that period is the sum of individual rates of occurrence.
63
Therefore, if one analyzes not only one, but all natural disaster risks together, it becomes clear
that multiple damage events of different types and different degrees of intensity may coincide
in any claim year. In actuarial terms, this means that the probable maximum loss in any year
is higher than the 200- or 300-year rate of occurrence for each risk.
Thus, the claim amounts which the insurance industry must be prepared for in such an extreme claim year, considering all natural disaster risks, is several times higher than the individual risk potential per risk. The latter calculations show that a capacity of about EUR 30
billion must be reserved in order to cover the claims in an extreme claim year, including all
risks, in the periods under examination.
Expected Annual Claims Burden
Based on the risk potentials and mathematical models, the annual expected claims were determined for all natural disaster risks. The result of the calculations depends on e.g. how conservative the selected model is and what basic claims burden is assumed. For example, for
reasons of safety, the maximum claim estimates may always be used, or the calculation is
always based on mean values. The annual expected claims burden calculated in each case
serves as the basis for creation of a premium model. GDV arrived at an annual expected
claims burden of up to EUR 2 billion, with the "storm" and "flood" risks making up the majority of the expected claims:
Übrige
Other
Gefahren
risks
up
2 bn
bisto
zuEUR
2 Mrd.
EUR
Flood/storm/ Sturm
Überschwemmung
However, the gross premium rate for compulsory natural disaster insurance, which should be
established without cross-subsidization, would be considerably above this value since the following items have to be included in the final gross premium:

Calculations based on risk and zoning as well as

distribution, operating, reinsurance and capital costs
On the other hand, allowing for deductible models reduces the level of the gross premium.
Private Insurance Capacity and State Guarantee
The above comments on the data indicate that a capacity of about EUR 30 billion must be
maintained in order to cover all claims in a year with an extremely high number of claims for
64
all risks. In view of this high amount, the private insurance industry had to determine what
annual claims burden can be borne by direct insurers and reinsurers on a private insurance
basis.
It is evident based merely on the actuarial data, such as the reinsurance and cumulative risk
capacity, that the full potential claims burden of EUR 30 billion p.a. cannot be borne by direct
insurers and reinsurers alone. Moreover, solvency regulations specify a certain capital adequacy ratio for each insurance company based on the ratio between the capital and the risks
insured. Since insurers do not have unlimited access to the capital and since the EU "Solvency
II" project is expected to tighten capital adequacy regulations, the annual claims burden which
can be borne by direct insurers and reinsurers is limited to around EUR 8 billion p.a. In view
of the potential claims burden of EUR 30 billion p.a., this results in a gap in capacity of at
least EUR 22 million p.a.
To close this gap in capacity the following options may be considered:

limiting the maximum compensation for natural disasters, including all risks, to the
amount which can be provided by the insurance industry each year (cf. approach of the
Swiss Natural Disaster Ordinance);

setting high natural disaster compulsory insurance deductibles per risk in order to reduce the PML, so that the residual claims burden for private insurers is ultimately reduced to the actually existing capacity;

not insuring all risks, but only those whose maximum annual claims burden does not
exceed the capacity of the private insurance industry;

insuring all natural disaster risks, and closing the gap between the capacity of the private insurance industry and expected maximum claims through a government guarantee; i.e. the Federal Republic of Germany would have to bear p.a. the claims burden
exceeding private-sector capacity.
These four options were subjected to an exact evaluation. In this respect, the main emphasis
was on questions concerning the economic workability of the models and their long-term capability of functioning. In addition, it was assessed to what extent each option is received with
acceptance in the Federal Republic of Germany (additional cost burden for the public and
businesses). On the whole, the first three options were not able to meet the specifications
mentioned:

The first option had to be discarded for the following reason: A maximum liability per
claim event or calendar year would mean that the amount of compensation, i.e. the
value of the compulsory coverage, would no longer be tangible for policyholders. In
this option, the compensation amount would be subject to apportionment depending on
the dimensions of the claim event or the course of claims in the calendar year. Furthermore, an accumulation of events could lead to unacceptably low compensation
amounts for policyholders (see the Swiss model). Finally, it would be practically impossible for insurers to make partial payments in the event of disasters, since the ultimate claims burden in major claim events is often not certain until much later.

The situation is similar for the high and far-reaching deductibles of the second option:
in order to reduce the risk to such a point that direct insurer and reinsurance capacity
would be sufficient, deductibles must be so high that policyholders would only receive
compensation in the case of very large and rare extreme events. On such a model no
political consensus would be possible.
65

Since political bodies intended to introduce compulsory insurance for all natural disaster risks (including “storm”), the third option had to be discarded as well. An option to
choose the risks to be insured from the point of view of insurance capacity was excluded according to the specifications of policymakers. However, the private insurance
industry has made clear, on the other hand, that for the "storm" risk there is already a
functioning market which has led to an almost comprehensive insurance density without state intervention.
The fourth option, however, opens up a solution: if the EUR 22 billion gap p.a. is closed by a
state guarantee, the problems involved in the first three options are largely avoided: compensation is no longer subject to apportionment, so that partial payments are possible at any time.
Also, due to moderate deductibles, compensation would not be limited to a few, extreme
claim events, as would be the case in the third option.
Therefore, in the models reviewed by GDV, the first three considerations were discarded and
further work was based on the last option, the state guarantee. Thus, all models with a privatesector approach reviewed for the Federal Republic of Germany require that, in addition to the
private insurance industry capacity, the expected claims burden of EUR 30 billion p.a. is
closed by a state guarantee in the amount of EUR 22 billion p.a.. The advantage of this concept is that the state is only involved in the duty to provide assistance to the extent private
provisions are exhausted by an extraordinary extreme event.
The private-sector capacity and risk potential calculated by GDV represent only a momentary
snapshot or a working hypothesis, particularly since the natural disaster reinsurance market is
subject to strong fluctuations which can have a direct impact on insurance capacity. Moreover,
the damage events caused by climate change cannot be quantified. Consequently, the "privatesector capacity" and "annual expected claims burden" parameters are subject to fluctuations,
so that rigid application of the state guarantee does not appear to be expedient. Instead, the
state guarantee must be applied flexibly, be available without time limit and cover even extreme events with high probability. First market polls have shown that an insurance capacity
of around EUR 8 billion can be made available, divided into EUR 4 billion from among the
ranks of direct insurers and EUR 4 billion from reinsurance.
Examination of Possible Models for Compulsory Natural Disaster Insurance
Taking into account the specifications of the working groups set up by the Federal Ministries
of Finance and of Justice GDV examined different actuarial models.
In this context, three aspects were of special importance:

Should compulsory natural disaster insurance be structured as general compulsory insurance or as mandatory coverage?

What conclusions result from the particularities of the German insurance market for
the structure of compulsory natural disaster insurance?

Which possible models qualify for practical implementation, what advantages and disadvantages are to be expected in each case?
66
Particularities of the German insurance market
When a compulsory insurance model involving an obligation to provide cover is introduced,
the following problems have to be taken into account:

An essential characteristic of the German insurance market is the marked regionalization of the market. Regional centres have developed both in line with company development and due to acquisition of smaller insurance companies focusing on certain regions by larger companies. With the successor companies of the former insurance monopolies this regional structure is especially pronounced. While these successor companies even today hold a market share in the building insurance sector in their respective regions of up to 80 %, the regional market share of companies operating on a nationwide scale varies strongly.

Therefore, natural disaster risks with marked regional features coincide with highly
different market shares. Two examples may illustrate this: Companies located in the
North Sea and Baltic coastal areas holding a large market share in these regions would
have to provide cover for a high storm and spring tide risk if compulsory natural disaster insurance were introduced. In other regions this would apply to the natural disaster
risks of earthquake, storm and flooding. On the other hand, companies holding only
small market shares in at-risk regions would have to bear much less cumulative damage in the event of a claim.

Companies having a large number of exposed risks in their portfolio would have to
have sufficient capital to remain capable of acting in economic terms despite high
compensation payments. Since only a limited amount of capital is available to them,
these companies, in order to be still able to write these risks, would have to cede a
large part of their risks to the reinsurance market as a substitute for further capital
needed. The accordingly high reinsurance quota would make natural disaster policies
much more expensive.

The reinsurance capacity needed would lead to strong demand in national and international reinsurance markets. Higher prices for natural disaster reinsurance capacity due
to increased demand could probably not be completely financed through premiums
since otherwise, due to the level of premiums, compulsory insurance would no longer
be accepted at the political and social levels. It is also for this reason that limiting the
private-sector capacity to EUR 8 billion would be expedient.
On the whole, the essential problems of the German insurance market are due to the different
regional distribution of risks and to the different exposure of individual regions to risk. These
key problems must be taken into account in further considerations.
This finding has led to three essential conclusions for the models to be reviewed:

All natural disaster risks have to be combined in a homogeneous total portfolio which
ideally should represent 100 per cent of risks and include exposed and less critical
risks for the purpose of comprehensive balancing of risks.

To make risks homogeneous it is necessary to found either a direct insurer or a reinsurer which combines the risks of all companies in a homogeneous portfolio and thus
67
balances them, which cannot be done by individual regional companies for the reasons
stated. However, individual companies may – for example, through retrocession – participate equally in the development of all risks.

Comprehensive insurance density and making portfolios homogeneous presuppose a
standardized rule for natural disaster coverage (standardized guidelines for acceptance,
premiums and policy conditions). This is the only way to effectively prevent that insurance density is reduced by risk selection and that the system of balancing is made
ineffective.
Compulsory Insurance and Mandatory Coverage
Basically, two solutions are appropriate for the structure of compulsory natural disaster insurance: general compulsory insurance or mandatory coverage.
A general compulsory insurance solution means that each building owner must obtain insurance for natural disaster risks, regardless of whether the building is otherwise insured, e.g. for
fire.
In contrast, mandatory coverage means that there is only an obligation to take out insurance if
there is a basic contract to this effect. The premium for natural disaster insurance is paid as a
surcharge on the basic premium (e.g. fire). There are two alternatives in this regard: this surcharge can be structured as a percentage of the fire insurance premium or as a premium. The
latter alternative leads to more risk-appropriate premiums since a simple percentage surcharge
does not constitute any safe basis for the assessment of natural disaster risks and thus results
in cross-subsidization among risks. This problem has already been explained in connection
with the models of Spain and France.
Essentially, both solutions are marked by the following aspects:

The motivation of policymakers with respect to the possible implementation of compulsory natural disaster insurance is essentially due to the fact that it is not the state
which has to provide compensation in the event of a disaster, but that compensation is
to a large extent paid through an insurance solution.

To ensure that the bearer of compulsory natural disaster insurance has sufficient funds
at his disposal to settle the claims, one prerequisite is that all insured sums for any
risks subject to compulsory insurance are fixed in a way that will stand judicial review
and that, consequently, sufficient contributions can be charged. The compulsory insurance system would lose its efficiency if insured sums were not controlled and adjusted
regularly. As in the motor TPL insurance sector, it should also be possible to impose
sanctions if policyholders do not provide details or deliberately provide incorrect details which would prevent any correct fixing of the premim. Therefore, any general
compulsory insurance scheme would have to be controlled on the part of the state,
which involves great administrative and financial expenditure. This expenditure would
make a general compulsory insurance scheme considerably more expensive.

Mandatory coverage would in practice be simpler and could be operated in a more inexpensive way. For example, it would not be necessary to draw up a second contract
since natural disaster risks could be incorporated into the basic contract as an annex.
Both the settlement and the issue of documents would be simplified accordingly,
which would reduce the financial burden on both insurers and premium payers. Moreover, in the case of mandatory coverage, the policyholder would only have little inter-
68
est in falsifying the insured sum of his basic contract so that he would have to pay
lower premiums for compulsory natural disaster insurance. In cases of doubt he would
then be underinsured for all damage events included in his basic contract (e.g. fire
damage). However, unlike in general compulsory insurance, it would not be possible
to achieve comprehensive insurance density through mandatory coverage.
Political bodies have not yet definitively opted for one of the insurance solutions. However,
they basically prefer the general compulsory insurance model since they wish, in particular, a
comprehensive (100%), independent insurance scheme and since it is to be prevented that
residents evade compulsory insurance by not concluding a basic contract. Moreover, it is to be
avoided that insurers change their policy of acceptance via the writing or calculation of basic
cover (see France).
For the models described below it is not of material importance which insurance solution will
ultimately be preferred. Notwithstanding that, a 100 % insurance density was taken as a basis
for future work.
The Direct Insurer Model
The basis of this model is the foundation of a direct insurer to combine natural disaster risks.
This “special direct insurer” enters a contractual relationship with policyholders. Direct insurers operating in Germany are merely subscription agents of the “special direct insurer”. The
graph below gives an overview of the “direct insurer model”:
Policyholders
Versicherungsnehmer
Direct insurers operating in Germany
In Deutschland
tätige Erst
Versicherer
Portfolio
management
& -claim
Bestandsverwaltung
&
Schadenbearbeitung
Processing against commission
Contractual
Vertragsrelationship
gegen Provision
bindung
Reglementierter
Preis je Zone
und RisikoFixed price depending
on zone
artand type of risk
Special
direct
insurer
(joint-stock
comSpezial
-Erst
-Versicherer
(AG)
pany)
Rückversicherung
Reinsurance
Staatsgarantie
State
guarantee
The tasks of the direct insurer consist in establishing insured sums (if appropriate, following
an on-site inspection), risk assessment (e.g. zoning, ZÜRS), establishing further risk characteristics and claim processing. For this, direct insurers make available appropriate resources.
Direct insurers receive reimbursement for their expenses from the “special direct insurer”.
The premium is imposed by the special direct insurer according to premium rates applicable
on a market-wide basis.
69
For the structure of reinsurance the following solution was envisaged:
„State
guarantee“
„Staatsgarantie“
layer
2.2nd
Layer
Reinsurance to German
Rückversicherung
an die deutschen
and international
reinsurers
und
internationalen
Rückversicherer
layer
1.1 Layer
Capacity provide
by direct insurers
Kapazität
der Erstversicherer
(with
or without
(mit oder
ohneretrosssion)
Retrozession)
st
Primary
layer
Primary
In the “primary layer” the special direct insurer provides a capacity of EUR 4 billion p.a. In
the “1st layer”, reinsurers follow with another EUR 4 billion p.a. After these the state guarantee follows as a “2nd layer” in the amount of EUR 22 billion p.a.
The capacity needed for the primary layer could be made available through a deductible of the
special direct insurer, which, however, would presuppose that the special insurer is accordingly capitalized. Alternatively, retrocession to direct insurers is conceivable. Through retrocession, the reinsurer participates direct insurers in the course of the entire risk brought in. Consequently, retrocession of homogeneous risks balances risks for direct insurers. Since retrocession is a proven instrument in reinsurance, it was included in further considerations, depending on the model.
Except for the state guarantee, reinsurance of the “special direct insurer” is effected purely on
a private-sector basis. The limited state guarantee would – as already stated – be available as a
2nd layer, in the event the capacity of the special direct insurer (primary layer) and the reinsurance capacity (1st layer) are not enough to cover the claim scenario.
Advantages of the “direct insurer model”:

In years of extreme damage, where the overall capacity of EUR 30 billion would not
be sufficient, insurance companies would, if they wrote risks on their own, face the
risk of a “second deductible” beyond the EUR 30 billion amount. Depending on involvement and financial capacity of individual insurance companies this could in extreme cases lead to insolvency. The “direct insurer model” shifts this insolvency risk to
the special insurer since direct insurers merely negotiate natural disaster risks to this
insurer. Thus, they do not undertake any financial commitment, neither with respect to
policyholders nor to the reinsurance market. Consequently, any insolvency due to extreme damage events would affect only the “special direct insurer”, but not the negotiating direct insurers. On the other hand, direct insurers only bear the limited risk due to
retrocession of the “special direct insurer”.
70

Since direct insurers do not include natural disaster risks in their own portfolios, the
aforementioned additional capital requirements according to solvency rules do not apply. On the other hand, the capital required due to retrocession are clearly limited as to
their amounts since risks accepted in retrocession amount to no more than EUR 4 billion.

The rating of companies has a direct influence on their capacity to act in capital markets. If the “special direct insurer” meets with economic difficulties resulting in a
downgrading of his rating, negotiating direct insurers would not be directly affected by
this situation.
Disadvantages of the “direct insurer model”:

Negotiating direct insurers would not be able to generate premium income from compulsory natural disaster insurance. Since, moreover, policymakers prefer inclusion of
the “storm“ risk in compulsory natural disaster insurance, considerable losses of portfolio would be the consequence since all “storm portfolios” would have to be transferred to the “special direct insurer”. In particular, legal intervention into the functioning natural disaster segment of “storm” is likely to be extremely objectionable in terns
of constitutional law.

Moreover, the “special direct insurer” would completely eliminate competition between insurers due to standardized premiums and standardized products. This would
probably constitute a violation of European and national anti-trust law.
71

In addition, each negotiating direct insurer would have to adjust its EDP in such a way
that the products of the “special direct insurer” can be processed. This may – depending on the structure of the data processing in place – involve considerable (consequential) costs for policyholders.

Also, for supervisory reasons and for its conduct of business the “special direct insurer” would have to build up great redundant capacity compared with the working capacity already existing in the insurance market.
The Reinsurer Model
In the “reinsurer model” direct insurers are not only intermediaries, but continue to bear the
risks of their policyholders. However, for reinsuring natural disaster risks they make use of a
“special reinsurer” which combines risks and thus covers a homogeneous portfilio.
The graph below gives an overview of the model
The policyholder is free to choose the company with which he concludes his insurance contract. Unlike in the “direct insurer model”, the direct insurer chosen by him directly concludes
a contract with the policyholder. Direct insurers are responsible for establishing insured sums
(if appropriate, following an on-site inspection), assessment of the exposure of risks (e.g. zoning, ZÜRS), portfolio management and settlement of natural disaster claims occurring. Although, theoretically, prices may be calculated and differently fixed by direct insurers, it
should be noted that the special direct insurer would require standardized prices per zone and
risk from direct insurers, irrespective of the premiums applied with respect to policyholders.
72
Also this model pursues the aim of creating a homogeneous overall portfolio, thus avoiding
risk selection. To achieve participation of direct insurers in risks, the “special reinsurer” retrocedes the primary layer of the cover (as described in the “direct insurer model”) back to direct
insurers. The capacity needed for the first layer may be realized through traditional reinsurance concepts. The limited state guarantee would be available as a 2nd layer, in the event the
capacity of direct insurers following retrocession (primary layer) and the entire reinsurance
capacity (1st layer) are not enough to cover the claim scenario.
Advantages of the “reinsurer model”:

The retrocession to the direct insurers enables the “special reinsurer” to allow direct
insurers to participate in the transaction. For direct insuers, this creates the opportunity
for profit in times with few claims. In years with a large number of claims the financial
risk is distributed among many companies.

Of far greater importance, however, is the function of retrocession as a balancing element in a market which, as described above, shows marked regional differences. Finally, direct insurers do not receive "their" risks in return, but only a percentage of the total, homogeneous risks. Thus, negative selection of risks is prevented. The retrocession
is conducted in proportion to the compulsory natural disaster insurance premiums received in order to allow for the financial capacity of direct insurers.

The “reinsurer model” is characterized by clearly less redundant capacity in terms of
staff (underwriting, administration, claim processing etc.) and EDP since the special
reinsurer would not have to reflect the complete structures of a direct insurer.
Disadvantages of the “reinsurer model”:
In the “reinsurance model” the direct insurer concludes the contract with the policyholder.
Therefore, according to current solvency rules, he has to hold available capital to this effect.
However, risks ceded to the reinsurer are only taken into account as to 50 per cent. Therefore,
direct insurers would still have to cover a large part of risks ceded to the reinsurer by capital.
Moreover, there are further capital requirements which – as described above for the “direct
insurer model” – result from retrocession. The question arises whether the additional capital
required can be raised by individual insurance companies. The need to pay interest on equity
capital accordingly will make premiums more expensive.
As stated above, to maintain the workability of the system, standardized guidelines for acceptance and premiums are required. Since, however, direct insurers will take into account
company-specific expense ratios (number of staff, degree of automatization of processing
etc.), competition based on costs is conceivable. Therefore, there could be less implications in
terms of ant-trust law than for the direct insurer model.
Basically, in the reinsurer model there is a risk that in accordingly large claim scenarios the
EUR 30 billion capacity is not enough. The “second deductible”, which would then have to be
borne, may possibly lead to insolvency of direct insurance companies.
73
Taking into account cash flows, the reinsurer model could ultimately be represented as follows:
Building
Pflichtversicherte
owners subject
to compulsory
Gebäudebesitzer
insurance
Pflichtversicherte
Gross
premiums
to compulsory
Gebäudebesitzer
insurance
Alle
All
Pflichtversicherte
Gross
premiums
Erstversicherer
Direct
insurers
to compulsory
Gebäudebesitzer
insurance
Alle
All
Pflichtversicherte
Gross - premiums
Erstversicherer
Direct
insurers
to compulsory
Gebäudebesitzer
insurance
Alle
All
Pflichtversicherte
Gross - premiums
Erstversicherer
Direct
insurers
to compulsory
Gebäudebesitzer
insurance
Alle
All
Pflichtversicherte
Gross
Solvabilitäts
Solvency
premiums
Erstversicherer
Direct
insurers
to compulsory
Gebäudebesitzer
insurance
anforderung :
requirement
Alle
All
Pflichtversicherte
Gross
Solvabilitäts
Solvency
premiums
Erstversicherer
Direct
insurers
to compulsory
Gebäudebesitzer
insurance
anforderung :
requirement
Alle
All
Pflichtversicherte
Gross
Solvabilitäts
Solvency
premiums
Anteilseigner
Shareholders
Interest
on equity
Anteilseigner
Shareholders
Gross premiums
Natural
Elementar
disaster
Interest
on
equity
Rückversicherer
reinsurers
Anteilseigner
Shareholders
Staatsgarantie
State
guarantee
Reinbursement
Gross premiums
of costs
Natural
Elementar
disaster
Administrative
Verwaltungskosten
costs
Interest
on equity
Rückversicherer
reinsurers
Anteilseigner
Shareholders
Staatsgarantie
State
guarantee
Reinbursement
Gross premiums
of costs
Sovency
Solvabilitätsanford
requirement
Natural
Elementar
disaster
- .
Administrative
Verwaltungskosten
costs
Interest
on equity
Rückversicherer
reinsurers
Anteilseigner
Shareholders
Staatsgarantie
State
guarantee
Reinbursement
Retro premiums
premiums
Gross
of costs
incl. cost of
Reinbursement
capital
Retro
Gross
premiums
of costs
2.
2
Layer
layer
Sovency
Solvabilitätsanford
requirement
Natural
Elementar
disaster
- .
Administrative
Verwaltungskosten
costs
(SB)
Interest
on equity
Rückversicherer
reinsurers
Anteilseigner
Shareholders
st
1.ndLayer
1
layer
2Elementar
layer
Sovency
Solvabilitätsanford
requirement
Natural
- .
(SB) disaster
Administrative
Verwaltungskosten
costs
2. on
Layer
Interest
equity
Rückversicherer
reinsurers
Anteilseigner
Shareholders
(SB)
Primary
Primary
layer
(SB)
st
1nd layer
2
layer
Sovency
Solvabilitätsanford
requirement
Natural
Elementar
disaster
- .
1.
Layer
Administrative
Verwaltungskosten
costs
Reinbursement
Kapitalk
Retro premiums
Gross
nd
Staatsgarantie
State
guarantee
Reinsurance
premium
Staatsgarantie
State
guarantee
Reinsurance
premium
Rückversicherer
Reinsurer
Summary Description of the Problems Involved in Compulsory Insurance
In addition to the areas described above, both models, at various points, cause further problems:
 The conditions for application of the state guarantee in the amount of EUR 22 billion must
be flexible.27
 The introduction of compulsory natural disaster insurance will interfere to a considerable
extent with a functioning market (“storm”).28
 The low insurance density shows that homeowners do not consider themselves to be at
risk due to natural disaster risks. Insurance density for natural disaster risks is approx.
5.4% in building insurance, with insurance cover being offered for more than 90% of inhabited areas. Therefore, it is not likely that compulsory insurance will be received with
acceptance.
 The demand of policymakers for premiums based on risk without cross-subsidization
leads to higher deductibles in exposed regions. Only through these high deductibles affordable premiums are possible. However, the high deductibles would lead to reduced
acceptance of compulsory insurance by residents since the amount of the average natural
disaster claim would still be within the deductible. Thus, in the great majority of claims
residents would not receive any compensation although they pay premiums regularly.
 In order for compulsory insurance models to be effective on a lasting basis, monopolistic
structures will be needed in order to guarantee the long-term stability of the system.29
 Sustainable compulsory natural disaster coverage must provide incentives for each policyholder to maintain and extend independent preventive measures. In exposed zones de74
ductibles constitute such an incentive for independent provisions.30 However, it should
be noted that, as already stated, the political and social acceptance with respect to the introduction of compulsory insurance is questioned by high deductibles.
 Legal disputes are to be expected which will delay the introduction of compulsory natural
disaster insurance or permanently interfere with its implementation in practice and effectiveness.31
 The fact that the state introduces a compulsory insurance which is not based on the concept of protection of third-party victims but merely stipulates how an owner has to protect his property is constitutionally objectionable.32
In light of the difficulties shown with respect to implementation of compulsory natural disaster insurance the Ministers of Finance of the Federal States decided in February 2004 not to
pursue this project for the time being.
Summary of the Federal Republic of Germany
 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, and
not by a state monopoly. The insurance is voluntary. The offer covers approx. 90% of inhabited areas; however, due to the inadequate consciousness of the risk among the public
demand is modest. There are no standard premium rates and deductibles; insurers must
calculate them using statistical data and management ratios. The member companies of
GDV have established a four-zone system for the flood risk (ZÜRS) based on the chance
of flooding.
 The debate on the introduction of compulsory natural disaster insurance has highlighted
certain problems. The key points are:

A flexible state guarantee without time limit in the amount of EUR 22 billion p.a.
must be available.

Solvency requirements result in a heavy burden on insurers and make premiums more
expensive.

Numerous legal questions relating to EU, constitutional, anti-trust and competition law
are currently unsolved.

Therefore, policymakers currently do not pursue the project of introducing compulsory natural disaster insurance.
75
Graphic Overview for Germany
76
Notes
1
http://www.geophys.washington.edu/SEIS/PNSN/INFO_GENERAL/eq_prediction.html
2
http://www.dwd.de/de/FundE/Klima/KLIS/prod/KSB/ksb02/Jahrhunderthochwasser.pdf
3
http://www.ipcc.ch/
4
http://www.umweltbundesamt.de/uba-info-daten/daten/klimaaenderungen-weltweit.htm
5
http://www.3sat.de/3sat.php?http://www.3sat.de/nano/news/25992/
6
3rd EU non-life insurance Directive (explanatory memorandum)
COUNCIL DIRECTIVE 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions
relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (third non-life
insurance Directive)
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Economic Community, and in particular Articles 57 (2) and 66 thereof,
Having regard to the proposal from the Commission(1) ,
In cooperation with the European Parliament(2) ,
Having regard to the opinion of the Economic and Social Committee(3) ,
Whereas it is necessary to complete the internal market in direct insurance other than life assurance from the point of view
both of the right of establishment and of the freedom to provide services, to make it easier for insurance undertakings with
head offices in the Community to cover risks situated within the Community;
Whereas the Second Council Directive of 22 June 1988 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of
freedom to provide services and amending Directive 72/239/EEC (88/357/EEC)(4) has already contributed substantially to
the achievement of the internal market in direct insurance other than life assurance by granting policyholders who, by virtue
of their status, their size or the nature of the risks to be insured, do not require special protection in the Member State in
which a risk is situated complete freedom to avail themselves of the widest possible insurance market;
Whereas Directive 88/357/EEC therefore represents an important stage in the merging of national markets into an integrated
market and that stage must be supplemented by other Community instruments with a view to enabling all policyholders,
irrespective of their status, their size or the nature of the risks to be insured, to have recourse to any insurer with a head office
in the Community who carries on business there, under the right of establishment or the freedom to provide services, while
guaranteeing them adequate protection;
(continued)
The full document can be viewed under
http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=DE&numdoc=31992L0049&model=g
uichett)
7
Horts Dietz, Wohngebäudeversicherung, 2nd ed., Karlsruhe 1999, J 1.1
8
http://www.consorseguros.es/
9
Thomas von Ungern-Sternberg, Gebäudeversicherung in Europa, Bern 2002, p. 69
10
Münchner Rück, Naturkatastrophen 2002
77
11
http://www.environment-agency.gov.uk/subjects/flood/351186/351222/351275/111650/?lang=_e
12
http://www.environment-agency.gov.uk/commondata/105385/frm_strategy_v1.2_573731.pdf
13
http://www.abi.org.uk/Display/default.asp?Menu_ID=718&Menu_All=1,714,718
14
http://www.abi.org.uk/Display/File/78/PPG25guidance2.pdf
15
http://www.CatNat.net/
16
Cantonal insurance monopolies in Switzerland:

Aargauische Gebäudeversicherungsanstalt
www.versicherungsamt.ch

Assekuranz Appenzell AR
www.assekuranz.ch

Basellandschaftliche Gebäudeversicherung
www.bgv.bl.ch

Gebäudeversicherung Bern
www.gvb.ch

Etablisement cantonal d'assurance des bâtiments ECAB
www.fr.ch/ecab

Kantonale Sachversicherung Glarus
www.gsv.ch

Gebäudeversicherung des Kantons Graubünden GVA
www.gva.gr.ch

Assurance immobilière du Jura
www.aij.ch

Gebäudeversicherung des Kantons Luzern GVL
www.gvl.ch

Etablisement cantonal d'assurance immobilière
www.ecai.ch

Nidwaldner Sachversicherung
www.nsv.ch

Solothurnische Gebäudeversicherung SGV
www.sgvso.ch

Gebäudeversicherungsanstalt des Kantons St. Gallen GVA
www.gvasg.ch

Etablisement cantonal d'assurance du canton de Vaud ECA
www.eca-vaud.ch

Gebäudeversicherung Kanton Zürich GVZ
www.gvz.ch

Gebäudeversicherung des Kantons Zug
www.gvzg.ch
17
http://www.swissre.com/INTERNET/pwsfilpr.nsf/vwFilebyIDKEYLu/CMMA553HZM/$FILE/Schadenversicherung_12_00.pdf
18
Thomas von Ungern-Sternberg, Gebäudeversicherung in Europa, Bern 2002, pp. 125 et seq.
19
Cf e.g. http://www.vistaverde.de/news/Wissenschaft/0307/31_gletscher.htm
78
20
As per 23 February 2004: 1 Swiss franc = 0.63 EUR
21
http://www.admin.ch/ch/d/sr/961_27/index.html
22
http://www.bund.de/Verwaltung-in-Deutschland/Bund/Der-Bund-von-A-Z-.4606.79255/Staatliche-Versicherung-derDeutschen-Demokratischen-Republik-in-Abwicklung.htm
23
http://www.gdv.de/presseservice/18350.htm
24
http://www.munichre.com/pdf/natcat_flut_d.pdf
25
http://www.gdv.de/
26
Replacement value coverage ensures that in the case of total loss the building may always be restored at the local cost
of new buildings. To this effect, the insured sum is adjusted annually by means of an index which allows for changes in
building costs and standard wages.
27
The time of application must be flexible because, due to changes in the market, it cannot be guaranteed that the insurance industry can provide EUR 8 billion each year. These changes may particularly involve the reinsurance market
(costs, capacity).
28
The introduction of compulsory insurance constitutes interference with a free, functioning market since natural disaster
insurance is already offered by the private insurance industry. In other words, the supply of natural disaster coverage is
not lacking, there is merely a belief on the demand side that insurance coverage is not necessary (a good 90% of the
population can obtain insurance today, but only 4% of building insurance policies and 10% of content insurance policies
have been extended to cover natural disaster risks).
29
Furthermore, the introduction of compulsory insurance would constitute the creation of a monopoly which is inadmissible in accordance with anti-trust law; this is especially true for the direct insurer model, but also for all other models, to
the extent that the introduction of compulsory insurance involves structures intended to equalize all risks, which differ
by region. Even corresponding state-based models would merely create a monopoly in disguise (see the Consorcio in
Spain).
30
Compulsory insurance, depending on its structures, does not necessarily involve that prevention or independent
measures by the public are weakened. The introduction of comprehensive compulsory insurance will certainly be met by
questions of why it should be invested e.g. in flood protection if the insurance company will pay in any case in the event
of a claim, whether or not protective measures are taken. Policymakers must create incentives for preventive measures in
order to keep compulsory natural disaster insurance premiums stable.
31
The introduction of compulsory natural disaster coverage is expected to involve numerous legal disputes, including
challenges to the compulsory nature of the coverage and contentions that the form of the coverage is invalid or that individual parameters are inadmissible (e.g. ZÜRS).
32
The concept of compulsory insurance is only regarded as permissible in accordance with German law in order to protect
third parties from the consequences of a damaging act so that compensation will be made by the party causing the damage, and not by the social security system (classical liability, e.g. motor vehicle liability). However, compulsory natural
disaster insurance does not protect third parties, but the owners themselves. This would be a legal novelty in Germany,
with no constitutional basis.
79
IV.
Appendices (Power Point Presentations in the Seminar)
Appendix 1:
Stefan Richter, Rainer Schönberger,
The legislations or regulations on catastrophe risks and the catastrophe insurance’s accounting requirements established by insurers or regulators in major EU countries
Appendix 2 :
Margarita Antonaki,
Greece – Cover of Natural Catastrophes
80