German Insurance Association
The legislations or regulations on catastrophe
risks and the catastrophe insurance’s accounting
requirements established by insurers or
regulators in major EU countries
Stefan Richter / Rainer Schönberger
German Insurance Association
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial reporting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 2
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial reporting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 3
German Insurance Association
Starting position (1)
 Large increase in extreme events
 Intensity of events steadily increasing
 Disproportionate rise in losses through:
 Increased settlement of exposed areas
 Progressive concentration of assets
 Expansion of basement space and technical equipment below ground level
 Climate change
 Actuarial situation
 Low insurance dispersion due to lack of demand
(problem of negative selection)
 Decline in insurance services for exposed areas
 Cutbacks and price increases in reinsurance capacities
 Increase in insurance premiums
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 4
1.1 Past events
German Insurance Association
Starting position (2)
Number of emergency losses in Germany since 1970
30
25
20
15
10
5
Storm
Flooding
Hail
Earthquake
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Miscellaneous
(e.g. forest fires,
avalanches, frost)
Page 5
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
1.1 Past events
German Insurance Association
Starting position (3)
Economic losses (euro millions)*
12 bill. €
6,000
4,000
2,000
0
* adjusted for inflation
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 6
1.1 Past events
German Insurance Association
Starting position (4)
Insured losses (euro millions)*
3.2 bill. €
2,500
2,000
1,500
1,000
500
* adjusted for inflation
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 7
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
German Insurance Association
Starting position (5)
Worldwide climate changes
Global effects ( IPCC document )
 Increase of 0.6 to 0.8 degrees Celsius in average temperature of
earth’s surface in the 20th century
 Model calculations for the 21st century show a temperature increase
of between 1.4 and 5.8 degrees Celsius
 Rise in sea level by 0.09 to 0.88 metres
 Retreat of glaciers and thawing of permafrost soils
 Increase in floods and droughts
 Higher maximum temperatures – more hot days and heat waves
 Higher minimum temperatures – fewer cold days, but increase in cold
spells
IPCC: Inter-governmental panel for climate change
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 8
1.2. Climate changes
German Insurance Association
Starting position (6)
Effects of global climate change - temperature
- Increase in global average
temperature in the 21st century
for the northern hemisphere
and the polar regions there
between
+2 °C and +6 °C.
- Increased ice melting
- Rise in sea level
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 9
1.2. Climate changes
German Insurance Association
Starting position (7)
Effects of climate change worldwide – precipitations
- Increase in precipitations in
the Asiatic region by up to +1.5
mm per day
- In connection with the
increase in temperature, the
climate cycle is increasingly
being fuelled with energy
which will manifest itself in
distinctive weather
phenomena
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 10
1.2. Climate changes
German Insurance Association
Starting position (8)
Effects of climate change worldwide – sea level
- Depending on the model calculation, the IPCC, based
on forecasts for global warming in the 21st century,
anticipates an increase in sea level of between 40 cm
and 60 cm.
- The increase forecast means that settlement will no
longer be possible in some regions.
- Even the most conservative model calculation shows
that numerous islands in the South Seas (e.g. Tuvalu)
will be flooded, and consequently will no longer be
habitable.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 11
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial reporting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 12
German Insurance Association
Examination of the European models (1)
Introduction
 Storm and temperature insurance in the following countries will be looked at:




France
Spain
Switzerland
Federal Republic of Germany
 The following will be highlighted:
 Structure
 Functionality
 Strengths and weaknesses
 The strengths and weaknesses of the German system will be shown using
the flood catastrophe of August 2002 as an example
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 13
German Insurance Association
Examination of the European models (2)
France - Structure
Government
(CCR*)
Reinsurance
- Proportional RI
- RI with unlimited liability
Insurance industry
...§§...
.......
State
specified
standard
premium
Policyholder
Private
Reinsurer
Mandatory for
- assets and vehicles as soon as they are insured
against other risks
*Caisse Centrale de Réassurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 14
German Insurance Association
Examination of the European models (3)
France – Functionality (1)
 By law, the French government and the private insurance industry are
to insure natural disaster and storm risks jointly. However, the private
insurance industry bears the risk, manages the insurance portfolios
and settles claims.
 Catastrophe insurance can be provided as a general obligation, or as
a compulsory addition to basic cover. France has opted for the
compulsory route. Insurance is mandatory for all assets and land
vehicles which are insured against “fire”, “other risks” or “loss of
business”.
 The state specifies a standard premium, except for the "storm" risk,
which is a percentage of the basic insurance premium (e.g. for fire
insurance). The same is true for deductibles.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 15
German Insurance Association
Examination of the European models (4)
France – Functionality (2)
 The state provides insurers with reinsurance capacity in two forms:
 “proportional reinsurance” or
 “reinsurance with an unlimited state guarantee”.
 The proportional reinsurance rates and direct insurer deductibles
have had to be raised in the past in order to keep the state-owned
reinsurer “Caisse Centrale de Réassurance” (CCR) solvent.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 16
German Insurance Association
Examination of the European models (5)
France – Strengths and weaknesses
 The CatNat system has proved to be unstable since its
establishment. The main reasons for this instability are:
 politically motivated interference with claim payments and
system design
 the conduct of the state reinsurer CCR, which, in an attempt to
improve its economic position by offering low premiums, merely
succeeded in accumulating exposed risks, thus destabilising the
system of comprehensive cross-subsidies and the model as a
whole.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 17
German Insurance Association
Examination of the European models (6)
Spain - Structure
Premium
Federal CatNat insurer
“Consorcio”
Insurance industry
Refund of expenses
Adjustment
of claim
Encashment
Policyholder
Mandatory insurance
- buildings and movables - motor vehicles - accident -
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 18
German Insurance Association
Examination of the European models (7)
Spain – Functionality (1)
 From the systematic point of view, the Consorcio does not constitute
a general compulsory insurance, but mandatory coverage.
 Despite the formal changes introduced in the course of deregulation,
the Consorcio remains Spain’s government insurance monopoly for
natural disasters.
 The Consorcio offers compensation for natural disasters, as well as
losses with political or social causes (terrorism, unrest etc.).
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 19
German Insurance Association
Examination of the European models (8)
Spain – Functionality (2)
 The Consorcio charges "levies" for numerous property “insurance
contracts” in the form of "levy rates" (these are in fact premium rates)
 The "levy" (insurance premium) is mandatory for buildings, building
contents, vehicles and persons.
 Standardised “premium rates” and “deductibles” apply.
 Claims settlement is performed by the Consorcio itself. “Premiums”
are collected by private insurers in return for reimbursement of costs.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 20
German Insurance Association
Examination of the European models (9)
Spain – Strengths and weaknesses (1)
 The restructuring of the Consorcio into an independent public
company subordinated to the Finance/Economics Ministry did not
alter the monopolistic character of this system.
 This assumption is supported by the fact that, in practice,
policyholders are refused access to private alternatives (“double
insurance” since the “levy” to the Consorcio is not dispensed with).
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 21
German Insurance Association
Examination of the European models (10)
Spain – Strengths and weaknesses (2)
 The system does not contain any incentives for prevention. Rather, it
encourages policyholders to place their trust entirely in compensation
in the event of a loss.
 Due to a lack of reinsurance and risk-related premiums, the system
will become unstable as extreme events become more frequent:
 Losses and insured values will increase
 Losses and increases in levies will spiral
 This cycle can only be broken through the introduction of structural
changes, e.g. by encouraging prevention
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 22
German Insurance Association
Examination of the European models (11)
Switzerland - Structure
7 Swiss cantons
19 Swiss cantons
Government
Private Insurance industry pool
Cantonal
monopoly
insurer
Pool allocates to A, B, C
Insurer A
Policyholder
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Policyholder
Insurer B
A/B/C
assign 85%
of claims
Insurer C
...§§...
.......
Standard premium
Page 23
German Insurance Association
Examination of the European models (12)
Switzerland – Functionality (1)
 Switzerland systematically chose general compulsory insurance rather than
mandatory cover.
 There is no standardised national system in Switzerland for natural disaster
insurance.
 In some of the Swiss cantons, the public cantonal building insurers (KGV)
offer natural disaster coverage as monopolies, while the private insurance
industry offers such coverage in others.
 Each building owner is under an obligation to take out insurance not only
against the usual risks (fire, storm, hail), but also against natural disaster
risks (flooding, avalanches, snow pressure, landslides, rock slides).
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 24
German Insurance Association
Examination of the European models (13)
Switzerland – Functionality (2)
 Risks are balanced within the private insurance industry through a
pool of private insurers.
 Companies assign 85% of their natural disaster claim expenses to
the pool, which distributes the claims burden across all of the pool
members in proportion to the premium revenue of the relevant
company. The private insurance sector is thus able to meet its
obligation of compensation for losses.
 On the other hand, the public cantonal building insurers rely solely on
the extensive financial reserves they have accumulated in the past
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 25
German Insurance Association
Examination of the European models (14)
Switzerland – Strengths and weaknesses
 The private insurance sector is restricted to 7 of the 26 cantons.
These 7 cantons, however, do not reflect the risk situation of
Switzerland’s federal territory. The opportunities for the private
insurance sector to spread risk adequately are therefore heavily
restricted.
 Switzerland’s system does not offer a comprehensive solution for
loss through catastrophe, as the policyholder, by virtue of limited
liability to 25 million CHF per case of loss and 250 million CHF per
event (for all losses !) must, in the event of doubt, bear the costs for a
portion of the loss himself. This applies to both private and cantonal
insurers.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 26
German Insurance Association
Examination of the European models(15)
Germany - Structure
Government
Premium
Supply
Claims adjustment
At present,
not
involved
Private Insurance industry
Demand
Policyholder
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 27
German Insurance Association
Examination of the European models(16)
Germany – Functionality (1)
 The insurance market in the Federal Republic of Germany has been
deregulated since 1994, so that insurance for natural risks is offered
by the private insurance industry rather than by a state monopoly.
 The Special Terms and Conditions of the private insurance industry
only covered the following risks:
 Flooding (including heavy rains, pressurised water and backwater)
 Earthquakes, land subsidence, landslides
 Snow pressure, avalanches
 Volcanic eruptions
 Storm
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 28
German Insurance Association
Examination of the European models(17)
Germany – Functionality (2)
 Insurance is voluntary.
 The scope covers approx. 90% of inhabited areas; however, due to
the general public’s lack of awareness of risk demand, it is modest.
 There are no standard premium rates or deductibles; insurers must
calculate them using statistical data and management ratios.
 Because each risk has to be assessed on a case-by-case basis using
statistical data, the zoning system ZÜRS has become an important
element of catastrophe insurance in Germany.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 29
German Insurance Association
Examination of the European models (18)
Germany – Functionality - ZÜRS (1)
 ZÜRS:
(Z)onierungssystem für (Ü)berschwemmung, (R)ückstau
und (S)tarkregen [zoning system for floods, backwater
and heavy rains]
 ZÜRS provides an underwriting tool for the insurance industry which
helps it to assess flood risk and offer a risk-related premium.
 At the heart of the ZÜRS system is a database which uses address
information (road network, house number data etc.) to show the risk
of flooding for any requested area.
 ZÜRS is used as a technical basis for future automated zoning
systems (e.g. earthquake zones)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 30
German Insurance Association
Examination of the European models (19)
Germany – Functionality - ZÜRS (2)
The ZÜRS software modules
 Three modules: ZÜRS Viewer, Blackbox and ZÜRS light database
 Modules are adapted to their intended use, e.g.:
 ZÜRS Viewer with graphic output at point-of-sale
 Blackbox for batch processing of small-scale volumes of data at
branch offices
 ZÜRS light database for implementation of the data in the
insurance industry’s mainframe computers. Automated data
interrogation possible for the official in charge.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 31
German Insurance Association
Examination of the European models (20)
Germany – Functionality - ZÜRS (3)
Data basis:
Digital elevation model
Digital terrain model
Digital terrain model as basis of work
Extraction of elevation models
from the terrain model
Digital elevation model
Creation of an elevation for Germany
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 32
German Insurance Association
Examination of the European models (21)
Germany – Functionality - ZÜRS (4)
Data basis:
Waterway network
High degree of accuracy
1st and 2nd order
waterways + flood-affected
small-scale waterways
recorded
50,000 kilometres of
waterways are digitised
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 33
German Insurance Association
Examination of the European models(22)
Germany – Functionality - ZÜRS (5)
Calculation of
flood areas
1.
Hydrology
- Specification of flood drainage
2.
Statistics
- Specification of basis for water quantity assessment
3.
Hydraulics
- Location calculation
(drainage quantity, valley profile, roughness,
speed, drop)
- Narrow simulation grid
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 34
German Insurance Association
Examination of the European models (23)
Germany – Functionality - ZÜRS (6)
Calculation of
flood areas
10-yearly flood
50-yearly flood
200-yearly flood
Co-ordination with the water economy
Printout of results on analogue maps
Visit to
200 water authorities
Increased quality through
• Consideration of anthropogenic influences
• Incorporation of events that have actually occurred
• Consideration of more accurate calculations
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 35
German Insurance Association
Examination of the European models (24)
Germany – Functionality - ZÜRS (7)
Zone division in ZÜRS 2004
•GK 4, high threat:
Statistically, flood at least once
every 10 years
GK1
•GK 3, medium threat:
Statistically, flood at least
once every 10-50 years
•GK 2, low threat:
Statistically, flood at least
once every 50-200 years
•GK 1, very low threat:
Statistically, flood less frequent
than once every 200 years
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
GK4
GK2
GK3
Page 36
German Insurance Association
Examination of the European models (25) - Germany
Strengths and weaknesses using the flood of August 2002 as an example
In 2002, the Federal Republic of Germany was affected by an extreme flood
event
 At the time,
 only 5% of buildings and
 10% of household goods in Germany were covered by catastrophe insurance,
even though insurance could have been taken out for around 90% of the
areas concerned.
 The German system suffers from the fact that supply and demand have no
common ground.
 Despite the substantial economic losses incurred by the flood catastrophe,
demand remained low
( suppression of risk)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 37
German Insurance Association
Examination of the European models (26) – Germany
Strengths and weaknesses using the flood of August 2002 as an example
Degree of economic loss
 Heaviest precipitations since weather records began in 1896
 Total loss € 9.1 billion (not including flood-related loss of
earnings)
 Commercial areas affected: businesses, industry, trade, inland
waterway transportation, agriculture, tourism, infrastructure
(roads, bridges, sections of railway line, power supply etc.)
 Environmental damage as a consequence of heavy pollution of
waterways
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 38
German Insurance Association
Examination of the European models (27) – Germany
Strengths and weaknesses using the flood of August 2002 as an example
Loss areas involved
Infrastructure of Länder and municipalities:
€ 3.316 billion
Private households (residential buildings and household goods): € 2.547 billion
Commercial activity
€ 1.438 billion
Federal infrastructure[1]:
€ 1.353 billion
Intervention and catastrophe prevention costs
in the Länder:
€ 0.224 billion
Agriculture:
€ 0.192 billion
[1]: Bahn AG facilities, federal motorways, federal highways, federal waterways,
government-owned property, as well as the costs for the deployment of over
73,000 workers drawn from the Technisches Hilfswerk [relief organisation], the
armed forces and the Federal Border Police
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 39
German Insurance Association
Examination of the European models (28) – Germany
Strengths and weaknesses using the flood of August 2002 as an example
Problems caused by state financing of flood damage
 The state paid out substantial subsidies to citizens affected by the
flood in 2002
 However, continual compensation through state subsidies whenever
catastrophes occur is causing considerable problems :
 A large number of claims (municipal and district authorities, regional and federal
ministries, Reconstruction Loan Corporation, Deutsche Ausgleichsbank and other
institutions)
 Parallelism of administrative procedures
 Rapid, unbureaucratic aid was severely hampered
 Release of funds slow as a result
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 40
German Insurance Association
Examination of the European models (29) – Germany
Strengths and weaknesses using the flood of August 2002 as an example
Problems caused by state financing for flood damage (cont’d)
 Question: Can financing of flood damage through taxation be justified?
 Equal status of insured and uninsured –
change of moral risk?
 The insured could have saved their premiums
 Critically important that insurance compensation is put before state
reimbursement
 Question: State help only in the event of major damage events?
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 41
German Insurance Association
Examination of the European models (30) – Germany
Strengths and weaknesses using the flood of August 2002 as an example
Economic need for action - conclusion
 Distribution discussion ex post leads to high degree of uncertainty
among affected parties
(no contractual regulation such as contracts of insurance)
 A large number of parties involved means a less-efficient solution
(in addition to the lack of a general framework and non-existent
experience of handling of damages)
 Parallelism of voluntary private provision and extensive public aid
(leads to displacement of private insurance with a higher requirement
for public resources)
 Development of a concept from the economic aspect is required
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 42
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 43
German Insurance Association
Catastrophe Insurance project in Germany
Project commission
 Preliminary considerations
 on the extent of insurance cover
(product design, risks, deductibles etc.)
 on risk potential, rates and reinsurance
 Development of actuarial models
 based on obligatory insurance
 or in the form of compulsory insurance
 The following will also be examined
 Original insurer model
 Reinsurer model
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 44
German Insurance Association
Catastrophe Insurance project in Germany
Product (1)
 Insured risks
 Flood / heavy rains / backwater / pressurised water (natural cause)
 Storm tide
 Earthquake
(fire due to earthquake is also covered)
 Landslide
(natural collapse of ground above natural hollow spaces)
 Landslip
 Snow pressure / avalanches
 Storm / hail
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 45
German Insurance Association
Catastrophe Insurance project in Germany
Product (2)
 Uninsured risks:
 Cavity following drought
 Gradual damage, etc.
 Volcanic eruption
 Meteorite impact
 Standard exclusions
(political risks, including acts of terror, fire etc., nuclear power, mains
water, frost, lightning, short circuit and excess voltage damage)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 46
German Insurance Association
Catastrophe Insurance project in Germany
Product (3)
 Insured objects
 Buildings used for housing purposes (minimum 50%), including
neighbouring buildings
 Backup: definition of the term “building”
 Buildings with primarily commercial (but also agricultural) use; up to € 5
million sum insured
 Cost item limited to 10% of the indemnification limit up to a maximum of
€ 100,000
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 47
German Insurance Association
Catastrophe Insurance project in Germany
Backup: Definition of the term “building”
 A building is a spatial enclosure designed for the protection of
persons, animals or objects against the effects of weather.
Permanently fixed to the ground, it is sufficiently stable to permit the
accommodation of persons.
 Necessary accessories such as sanitary, heating, water and electrical
installations, built-in kitchen furniture and neighbouring buildings (e.g.
garages, car ports or garden sheds) are included in building
insurance cover
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 48
German Insurance Association
Catastrophe Insurance project in Germany
Product (5)
 Uninsured objects / damage
 Buildings not ready for use
(first-time purchase)
 Buildings earmarked for demolition
 Contents, BU (Berufsunfähigkeit? = occupational disability)
 Isolated special-purpose buildings (allotment sheds, field barns, etc.)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 49
German Insurance Association
Catastrophe Insurance project in Germany
Product (6)
 Insurable value
 Reinstatement value: with dynamisation
 Procedures still need to be developed for binding arrangements in
individual cases and on how to handle changes in assets where a total
limit applies
 Deductibles
 Exposed risks (ZÜRS zones III and IV; storm tide, earthquake):
Deductible of 5% of sum insured, min. € 5,000, max. € 50,000 per event
and place of insurance.
 Non-exposed risks: deductible of 0.5 % of sum insured, min. € 500,
max. € 5,000 per event and place of insurance.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 50
German Insurance Association
Catastrophe Insurance project in Germany
Product (7)
 Event definition
 Risk of flood
 All other risks:
168 hours
72 hours
Subject to approval of reinsurers
 Cost unit rate of product
 Operating, claims processing and commission costs should be taken
into account
 Savings can be generated by using existing structures in acquisition and
administration
 Capital costs must be considered separately.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 51
German Insurance Association
Catastrophe Insurance project in Germany
Product (8)
 Premium adjustment clause
 Premium-related consideration of rising claims expenditure, climate
change and risk of error.
 Designed without a threshold value
 Premium adjustment clause
 Necessary in order to be able to respond to unexpected developments,
e.g. in individual cases of damage.
 Sustainability and control
 Sustainability and control must be ensured by local authority areas.
 Time of implementation
 Duration of implementation: about 2 years after law comes into force.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 52
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 53
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (1)
 Assessment of total insurance portfolio:
 All residential buildings
 Commercial buildings up to € 5 million
 Commercial buildings include buildings used for agricultural purposes
 The current portfolio for fire is being assessed (in the case of fire, there
is almost 100% insurance dispersion)
 Sources: Industry and risk statistics
 Estimate of model-related sum insured: ca. € 8.5 billion
 Based essentially on sliding replacement value insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 54
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (2)
Deductibles model per case of damage / policyholder
 For exposed risks
 5% of sum insured, minimum € 5,000, maximum € 50,000:
Flood: zones 3 and 4 in accordance with ZÜRS 2004
Earthquake: earthquake zone 3
Storm tide: storm tide zone
 For all other risks
 0.5% of sum insured, minimum € 500, maximum € 5,000
Note: If property relating to one risk is assessed as exposed, then the
high deductible is only applied to that risk!
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 55
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (3)
Estimate of risk potential – Simulation / Flooding
Computer-generated threedimensional elevation models,
with addition of
concentration of assets
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Extent of flood using
inflows, outflows and
contour lines
Extent of flood taking
into account
embankments, weir etc.
Page 56
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (4)
Estimate of risk potential – Simulation / Earthquake
Analysis of
tectonic
measurement
data
Analysis of damage
events
(epicentres, causes
and effects)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Simulation, taking into
account tectonic structures
and geophysical research
results
Page 57
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (5)
Estimate of risk potential
 Applied models
 Internal simulation systems of reinsurers Münchner Rück and Swiss Re
 Commercially available systems
 EQECAT
 RMS (no model available in Germany for flooding / earthquakes;
Storm: Clear deviations from other models, little suitable data)
 The results in the simulation systems were in a manageable range
 sufficient validity of findings
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 58
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (6)
Estimate of risk potential
 Classification by
 CRESTA zone (earthquakes)
 The CRESTA (Catastrophe Risk Evaluating and Standardising
Target Accumulations) zone data is based on the zoning system
established by the world's leading reinsurers.
 Based primarily on the observed or expected seismic activity within
a country, CRESTA zones consider the distribution of insured
values within a country as well as administrative or political
boundaries for easier assessment of risks.
 Postcode areas in Germany
 Classification by postcode area permits a more detailed
examination per territory of the Federal Republic of Germany than
would be possible by just taking into account the CRESTA zones
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 59
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (7)
 Estimate of risk potential
 Calculation using meteorological, hydrological and seismological models
 Calculations of the various reinsurers involved and results of various
suppliers of software for cumulative estimate
 Based on international custom, the figures 200 and 300 were used as
yearly units.
 Between 200 and 300 years there is a clear increase in potential
 Varying estimates of discharge effects through deductibles with extreme
events extend the margin of estimates
 A year takes the reciprocal of the probability of one year being
exceeded, i.e. a level x event occurs with probability p within a
(calendar) year.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 60
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (8)
 Risk potential: Storm excluding deductible
 200-year
 300-year
€ 7 – 9 billion
€ 9 – 12 billion
 Risk potential: Storm with deductible model
 200-year
€ 3.8 – 5.5 billion
 300-year
€ 5.5 – 8.5 billion
 Notes:
 The yearly PML is higher
 Realistic worst-case scenarios not possible
 Increasing probability of occurrence (climate change)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 61
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (9)
 Risk potential: Flood excluding deductible
 200-year
 300-year
€ 7.5 – 10 billion
€ 9 – 12 billion
 Risk potential: Flood with deductible model
 200-year
€ 5.5 – 8 billion
 300-year
€ 6.5 – 9.5 billion
 Notes:
 The yearly PML is higher
 Realistic worst-case scenarios not possible
 Increasing probability of occurrence (climate change)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 62
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (10)
 Risk potential: Earthquake excluding deductible
 200-year
 300-year
€ 6.5 – 9 billion
€ 9 – 12 billion
 Risk potential: Earthquake with deductible model
 200-year
€ 5 – 8 billion
 300-year
€ 7 – 10.5 billion
 Note:
 Realistic worst-case scenarios not possible
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 63
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (11)
 Risk potential: Storm tide
 Revision of existing scenarios (€ 10-20 billion) carried out by the storm
tide working party of the GDV. The studies are not yet complete.
 Risk potential: Other risks under € 1 billion
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 64
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (12)
Notes on risk potential
 Individual risk potential is calculated on an event basis
 The yearly PML can be above the PML of the individual event
 The loss burden must be added for the PML event
 Because of volatility, several events can accumulate per year
 Events can also occur in correlation to one another
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 65
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (13)
Conclusions from risk potential
 In order to ensure adequate cover for the scenarios illustrated, an annual
capacity of € 30 billion is required for the Federal Republic of Germany.
 However, only € 6-8 billion* in capacities is available in the private sector in
the Federal Republic of Germany.
 In order to cover the shortfall, a government guarantee of € 22 billion is
required
* Capacities of original insurers and reinsurers operating in Germany
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 66
German Insurance Association
Catastrophe Insurance project in Germany
Backup: Purchasing reinsurance (1)
 Based on a government guarantee, the following aspects should be
taken into account when purchasing reinsurance “by line”:
“By line” purchasing distinguishes between risks
Targeted purchasing is possible
Higher capacities are available
One-off replenishment per capacity is usual and available on the market
at favourable cost
 Similarly, however, the government guarantee would have to be shown
“per risk”.




 However, this conceals the risk that, in cases of extreme damage, the
financial resources of a risk line would be exhausted, while the funds for
other lines remain untouched.
 A capacity shortfall could be avoided if each risk line were afforded a
maximum capacity of € 22 billion; however, there is no discernible political
will at present in this respect.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 67
German Insurance Association
Catastrophe Insurance project in Germany
Backup: Purchasing reinsurance (2)
 Purchasing reinsurance as a “package”
 “Package” purchasing is the simpler solution
 Only limited capacities available on the market
 However, because of the difficulties described with reinsurance “by line”,
“package” reassurance is preferred
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 68
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (14)
 Annual expected loss
 Calculation of expected loss is based on models
 The various estimates of event loss distribution are systematically
assumed
 Method-constant procedure: The mean value of the estimates was
systematically taken
 Plausibility checks with various risk insurance rates or GDV studies
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 69
German Insurance Association
Catastrophe Insurance project in Germany
Risk potential and rates (15)
 Estimate of gross premium income:
Total budget excluding storm tide
 The following expenditure should be taken into account:
 Risk premium
 Expected profit
 Balance of reinsurance
 Safety loading
 Equity capital costs
 Severe loss reserve
 Administrative costs
 ...
 Total gross premium is roughly € 3.3 billion over about 18.5 million
contracts
 This represents a gross contribution rate of around 0.40 ‰ in relation to
the building values represented
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 70
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 71
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (1)
The following steps were taken:
 Investigation and decision about which insurance system is to be
used
 Compulsory insurance system, or
 Compulsory contributions system
 Investigation and decision about which insurance model is preferred
within the chosen system
 The original insurer model, or
 The reinsurer model
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 72
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (2)
Definition of terms:
 Compulsory insurance
 For the regulation existing in accordance with the law governing
compulsory insurance, a corresponding insurance policy must be taken
out by the owner for an object defined in law.
 Compulsory contributions
 A statutory obligation to take out catastrophe insurance only exists if the
policyholder takes out a policy for specific, statutorily-defined basic risks
where catastrophe insurance is mandatory.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 73
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (3)
Compulsory insurance (1)
 Advantages of compulsory insurance
 As a general obligation exists for insurance, market density of 100% is
guaranteed
 Policyholders cannot escape this obligation by the fact that they no
longer take out basic insurance
 Compulsory insurance can be offered as a separate product by a large
number of insurers
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 74
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (4)
Compulsory insurance (2)
 Disadvantages of compulsory insurance
 The system has to be sustained and controlled by the government at
high administrative cost in order that the objects defined by law are
actually insured
 Designing this as a separate product results in a higher cost burden
(e.g. IT, administration costs, operating costs)
 The higher costs lead, in turn, to a further burden on insurers and
premium payers alike
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 75
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (5)
Compulsory contributions (1)
 Make-up of compulsory contributions
 Mandatory insurance against force majeure risks for residential
buildings, as well as for buildings used for commercial and agricultural
purposes.
 Premium is made as a surcharge for fire insurance (possible as a
percentage surcharge or as a premium rate – the latter solution offers
more adequate risk management, as the fire insurance premium does
not represent a basis for calculating force majeure risks)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 76
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (6)
Compulsory contributions (2)
 Compulsory contributions offer the following advantages:
 Portfolio management is simpler and more cost-effective as no additional contract
has to be entered into. This means that both insurers and premium payers are
spared additional costs.
 Existing catastrophe insurance contracts could be transferred (since, in most
cases, they are maintained as an annex to fire insurance in the portfolios)
 The high level of bureaucracy involved in sustaining and controlling compulsory
insurance no longer applies
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 77
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (7)
Result of examination of the insurance system
 The political climate supports compulsory insurance for the
following reasons:
 Fear that insurers will change their acceptance behaviour on
underwriting basic cover
 Non-existence of 100% market cover with compulsory contributions
 On this basis, it was assumed during the course of further
considerations of the various insurance models that catastrophe
insurance should be introduced as compulsory insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 78
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (8)
Preliminary comments on the examination of the insurance model
 The fundamental features of the German insurance market are:
 strong regionalisation of the market (history of the origins of companies),
and
 extremely diverse exposure of insurers in respect of catastrophe risks
 In order to guarantee a functioning risk spread, a specialist
catastrophe insurer is required which bundles all risks
 Such a specialist catastrophe insurer can be either an original insurer
or a reinsurer
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 79
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (9)
Policyholder
Commitment
to contract
Original insurer model
Original insurers
operating in Germany
Subscription agent only
(commission-based brokerage,
portfolio management and
claims processing)
Regulated price per zone and risk type
Specialist original
insurer (AG)
Reinsurance
Government guarantee
Equity capital/Shareholder
Aggregate excess of loss capacity (capacity across all
risks of reinsurers resident in Germany)
Insolvency of specialist original insurer in the event of
loss expenditure exceeding a limited government
guarantee
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 80
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (10)
Evaluation of original insurer model
 The original insurer model has numerous disadvantages:
 Portfolio losses with the inclusion of storm insurance can create financial
problems, particularly for smaller insurers
 Damage to market approach; distribution of products of a third-party
company
 Elimination of competition (cartel law!)
 Staff redundancies between original insurer and specialist original
insurer; splitting of underwriting and policy formulation functions not
permissible
 High IT investment
 Because of these disadvantages, the initial insurer model has
been rejected
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 81
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (11)
Reinsurer model
Policyholder
Risk-ceding
original insurers
Retrocession
100% of primary
Specialist
reinsurer (AG)
Full cession to specialist reinsurers / avoidance of
negative selections
Cession in
return for
reinsurance
commissionRegulated price per zone and risk type
Equity capital / Shareholder
Reinsurance
Aggregate excess of loss capacity across all risks
Government
guarantee
Limit of liability in relation to original insurer and insured
required in the event of an insufficient government
guarantee
(Limited liability may not apply if, including retention and reinsurance, total
liability coverage of € 30 billion is available)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 82
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (12)
Evaluation of reinsurer model
 The reinsurer model has the following advantages:
 Participation in course of business through retrocession to original
insurers
 Customer relationship remains with the original insurer
 Portfolio management / support by original insurer
 Net risk bearer is a catastrophe reinsurer
 Less complicated than original insurer model in terms of cartel law
 Avoidance of staff and IT-related redundancies in the areas of
underwriting, administration and claims processing
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 83
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (13)
Evaluation of reinsurer model
 Despite the stated advantages, the reinsurer model entails a deep
fracturing of the German insurance market as it requires both
 the creation of a standard product, and
 a regulated flat premium
 However, the advantages outweigh the disadvantages when
compared with the original insurer model
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 84
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (14)
Result of comparison of original insurer and reinsurer models
 The reinsurer model is preferred – subject to current solvency
requirements for original insurers.
 To avoid a second retention of original insurers (risk of ruin!), this
model requires a total capacity of € 30 billion p.a.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 85
German Insurance Association
Catastrophe Insurance project in Germany
Backup: Other models
 Government- and tax-financed models have not been considered in
Germany, as policy guidelines dictate that only actuarial models
should be tested.
 The background to this decision is the general disadvantages of
government- and tax-financed models:
 These models generally lack a facility for regional risk spreading
 In the case of a loss, a lack of specific purpose for resources can mean
that the resources necessary for compensation for damages are not
available
 The stated models involve intervening in the existing free market
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 86
German Insurance Association
Catastrophe Insurance project in Germany
Actuarial models (15)
Intermediate result
 In Germany, an annual capacity of € 30 billion is required for the
implementation of mandatory catastrophe insurance or compulsory
catastrophe insurance
 Implementation of a limit of liability (per policy / per event) is not feasible for
both political and legal reasons.
 The structure of the reinsurance must reflect the above government
guarantee.
 However, in order not to be burdened with handling frequent damages or
small-scale damage events, the government will only provide capacity within
the context of a “reinsurer of the last resort”
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 87
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 88
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (1)
Structure of reinsurance
“Government guarantee”
2nd layer
Reinsurance to German
and international reinsurers
1st layer
Capacity of original insurers
(with or without retrocession)
Primary
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 89
German Insurance Association
Catastrophe Insurance project in Germany
Here: Premium flow, solvency requirements in the reinsurance model (2)
Compulsorily insured
building owners
Shareholders
Gross premiums
All
original insurers
Solvency
requirement
Solvency
requirement
Equity yield rate
Gross premiums
Refund of costs
Catastrophe reinsurer
Government guarantee
Provision for risks
Administration costs
Solvency requirement
Retro premiums,
incl. capital costs
3rd layer
2nd layer
Reinsurance
premium
1st layer
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 90
Reinsurer
Solvency
requirement
German Insurance Association
Catastrophe Insurance project in Germany
Backup: Rates and reinsurance (2a)
 Notes on the “Premium Flow” diagram
 The limits of the individual layers would have to be negotiated
specifically as required.
 Solvency requirements are derived from existing regulations or for
catastrophe reinsurance through analogy conclusions. Only the
premiums index is represented.
 The equity yield rate for the transferred business (original insurers as
retrocessionaries) is paid in settlement via the retro premium.
 Effects of Solvency II are not taken into account
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 91
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (3)
Risk differentiation
In accordance with the non-binding risk premium rates published to date,
or more precisely the Association’s studies, the following regional
differentiations have been investigated in an initial project phase:
 Four ZÜRS zones
 Three earthquake zones
 Two storm zones
 Two storm tide zones
Further differentiations were not the subject of the discussion.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 92
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (4)
Spread of rates
in connection with the relevant zones is considerable
The following two approaches are possible:

Percentage distribution
Here, costs are charged as a percentage of net premiums. This means
that exposed zones have to bear much higher costs than favourable
zones.

Sum insured-dependent distribution
Sum insured-dependent distribution of costs is also conceivable. This
would enable the lowest possible cost burden - even for exposed risks.

This point has not yet been finally decided.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 93
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (5)
Abstract example:

- Note Example of calculation
using fictitious parameters
Percentage distribution
 Of a non-exposed risk:
- Ins.: € 300,000
* 0.18%o net premium
e.g. + 50% surcharge for costs
Gross premium
= 54 €
= 27 €
= 83 €
* 1%o net premium
e.g. + 50% surcharge for costs
Gross premium
= 300 €
= 150 €
= 450 €
 Of an exposed risk :
- Ins.: € 300,000
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 94
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (6)
- Note Example of calculation
using fictitious parameters
Abstract example:

Sum insured-dependent distribution
 Costs are calculated independently of claims expenditure
 Of a non-exposed risk:
- Ins.: € 300,000
* 0.18%o net premium
e.g. + 0.2%o surcharge for costs
Gross premium
= 54 €
= 60 €
= 114 €
* 1%o
net premium
e.g. + 0.2%o surcharge for costs
Gross premium
= 300 €
= 60 €
= 360 €
 Of an exposed risk:
- Ins.: € 300,000
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 95
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (7)
Flood prevention – Circumstances
 Bearing in mind the experiences of recent years, it would be
desirable if greater importance were attached to flood prevention in
building design
 Planning laws and building regulations in Germany often exist at
regional level, that is to say building regulations vary across 16
regions and reflect the interests of the individual Land. The state has
limited influence on the Länder in respect of building regulations.
 The Artikelgesetz zum Hochwasserschutz [law governing flood
prevention] is a government initiative designed to regulate flood
prevention at national level. It was brought before the Bundestag
[German lower house of parliament] in June 2004.
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accounting requirements established by insurers or regulators in major EU countries
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German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (8)
Artikelgesetz zum Hochwasserschutz (1)
 The law is an attempt by the state to eliminate regulatory and law
enforcement deficiencies of various standards in flood prevention
 Water Resources Management Act, Town and Country Planning Code,
Regional Planning Act
 German Meteorological Services Act, Federal Waterways Act
 Aims of the legislators
 Implementation of more effective flood prevention
 Reinforcement of the prevention concept, and
 General reservation of flood areas
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accounting requirements established by insurers or regulators in major EU countries
Page 97
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (9)
Artikelgesetz zum Hochwasserschutz (2)
 Legislative measures include:
 Establishment of a standard flood area (recurrence period = 100 years)
through national law
 Drafting of flood prevention plans
 Cross-border coordination of regional planning measures
 Revelation of flooded areas in land development and building plans
 An order governing bans on agricultural farming in exposed areas
 Adoption of the law is still outstanding as it awaits approval by the
Bundesrat [German upper house of parliament]. The impact of the
law would not be felt in any case until 2010 at the earliest as its
implementation in the various Länder would take at least 5 years.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 98
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (10)
Artikelgesetz zum Hochwasserschutz (3)
 The GDV welcomed the statutory initiative as
 it represents an opportunity to prevent further settlement in exposed
areas with new buildings, and
 by establishing flood areas, owners of existing buildings are made
aware of the actual risk faced by their property.
 Furthermore, with the introduction of the law, the Länder and local
authorities are obliged to invest specifically, and increasingly, in
preventive measures, for example through
 purchase and pre-assembly of mobile flood barriers
 storage reservoirs, dams and embankments
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accounting requirements established by insurers or regulators in major EU countries
Page 99
German Insurance Association
Catastrophe Insurance project in Germany
Rates and reinsurance (11)
Prevention measures outside state regulations
 Private individuals
 Citizens’ opportunities to take their own preventive measures (e.g.
installation of backflow valves)
 Citizens are often advised that their towns and cities and communities
will adopt initiatives for corresponding projects (e.g. storage reservoirs)
 Industry
 Industry’s strength in terms of capital resources means that more
substantial construction and organisational measures are possible, e.g.
 Own safety embankments and earth banks to raise levels
 Choice of waterproof materials and installation of anti-flooding devices
 Conversion of gates, doors and windows to enable rapid manual sealing
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 100
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 101
German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (1)
Principles for solvency
 Solvency: Capital resources and risks must exist in an appropriate ratio
 The EU Commission’s “Solvency II” project for reform of the European
Insurance Supervisory Authority anticipates increased requirements for
solvency
 Three pillar approach:
 Pillar I: Risk-based capital resource requirements  Consideration of
company-specific risk
 Pillar II: Qualitative requirements  Risk management systems will be
examined by the supervisory authority in future
 Pillar III: Information obligations  In future, insurers will have to publish
more information about their business processes than they do at present
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 102
German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (2)
Under the present legal conditions, it is costly for original insurers in
Europe to comply with existing solvency regulations
 Reinsurance protection is only taken out in 50 per cent of cases
 Settlement is only possible through increased equity capital
 Solvency II affects companies of all legal forms (not just companies
with IAS/IFRS* accounting procedures)
 Solvency II will have the following impact:
 The reinsurer’s risk of default is to be assessed in future;
 Purchased reinsurance protection will be offset in full (100%)
 There will be a considerable burden on insurers at regional level who do
not have the facility for spreading risk
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
*International Accounting Standards
International Financial Reporting Standards
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German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (3)
Simulations of the effects of Solvency I and II were carried out for the
insurance model. The following points were assumed for both
solvency systems.
 IAS / IFRS effects
 Probably only to be applied mandatorily to consolidated financial
statements of capital market-oriented companies.
 Risk of extension of mandatory area of application exists.
 In the final analysis of a jumbo risk provision, a tax-favoured solution
must exist even if new legislation applies.
 Permissibility of tax allowable jumbo/cumulative risk provisions
 Not possible at present
 Recognition must be guaranteed politically
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 104
German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (4)
Effects on existing solvency system (Solvency I)
 In terms of the total gross premium calculated, for the market there will be an
additional equity capital requirement of roughly € 300 million
 On top of this, there are equity capital requirements from the retrocession for
original insurers. These come to approximately € 250 million (where they are
not reinsured further).
 With a cumulative event (€ 15 billion loss in 3 years = € 5 billion p.a.), there
would be a capital equity requirement of around € 600 million for selfconcluded business, and around € 800 million from the retrocession
 The total additional equity capital requirements for an unfavourable loss
therefore add up to € 1.4 billion, which the market would have to find if
compulsory catastrophe insurance were introduced !
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 105
German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (5)
Effects on existing solvency system (Solvency I)
 Outstanding issues
 for original insurers
 Extent of additional solvency requirements, for example for insurers
heavily exposed at regional level (loss index).
 Consideration of the government guarantee within the scope of
solvency requirements (not regulated by law at present).
 Complete offsetting of risks stipulated in reinsurance cover
desirable
 for specialist reinsurers
 Solvency regulations do not yet apply to reinsurers.
 However, it is expected that reinsurers will also have to observe
these regulations in future
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accounting requirements established by insurers or regulators in major EU countries
Page 106
German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (6)
Rating of specialist reinsurer
 Sufficient rating required if rating and equity capital requirements
of original insurers and reinsurers concerned are not to be
burdened.
 To limit the equity capital requirements for specialist reinsurers, the
tax deductible aspect of the government guarantee must be
clarified.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 107
German Insurance Association
Catastrophe Insurance project in Germany
Financial accounting and solvency (7)
Summary of necessary conditions:
 Formation of tax-free major damage provisions
 Appropriate rate of interest on the necessary tied equity capital.
 To limit the equity capital requirements for specialist reinsurers, the
tax deductible aspect of the government guarantee must be clarified.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 108
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 109
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (1)
Advantages of compulsory catastrophe insurance
 Unburdening of government budget from the consequences of
natural catastrophes (economic damage)
 Stemming the effects of large-scale catastrophes through prefinancing of damages
 Signal effect for the legislator to increasingly integrate preventive
elements into building design and flood prevention
 Exercise of social and political responsibility through participation in a
compulsory insurance model
 Sensible capitalisation of resources in the insurance industry for the
common good
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 110
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (2)
Disadvantages of compulsory catastrophe insurance:
 Possible drain on purchasing power of population at large
 Acceptance and negative image problems for the legislator as the law
prescribes that policyholders with little risk awareness must take out
compulsory insurance
 Distortion of competition in a functioning market
 High administrative expenses and high costs for monitoring statutory
insurance and sustaining correct insured sums
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 111
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view(3)
Legal issues of compulsory insurance (1)
 Intervention in the contractual freedom of insurer and insured, as a
workable model requires the introduction of a legal obligation to
accept contracts (not justified by third-party victim cover)
 Compatibility with the principle of equality before the law is in
question, as
 not all insured are affected by the risks,
 subdivision into risk zones is ultimately unclear, and there is no legal
basis
 Definition of the group of insured / insurance contributor is
problematic under constitutional law (which buildings; contents;
inventory; commercial activity; industry; tenants etc.).
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 112
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (4)
Legal issues of compulsory insurance (2)
 Actuarial models are problematic under cartel law as the models only
become fully functional with the introduction of standard premiums
and acceptance of restricted competition
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 113
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (5)
Necessity for a government guarantee
 Cumulative and single loss potential of catastrophe risks can amount
to more than € 30 billion p.a. During the development phase in
particular, but also in the medium term, these capacities alone cannot
be depicted via premium income.
 There is insufficient private capacity available to provide security for
such damages – a solution using limits of liability against the insured
is neither feasible nor permissible by law
 Compulsory catastrophe insurance therefore requires a government
guarantee of the order of around € 22 billion p.a.
 The government guarantee must be available for an indefinite period
of time, cover all loss scenarios, and have a flexible point of entry
which is commensurate with the amount involved
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 114
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (6)
Lack of acceptance by building owners (1)
 A good 90% of insured parties are now able to take out catastrophe
insurance; however, due to lack of demand, there has been very little
market penetration to date (11% household goods; 5.4% buildings)
 The insured – despite events / media reports – do not feel
subjectively at risk
 Public perception: The problem of individuals (less than 10% are
affected by flood scenarios) should be borne by “all German citizens”
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 115
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (7)
Lack of acceptance by building owners (2)
 Risk-adequate premiums (excluding cross subsidisation) require high
deductibles in higher risk zones (5% of sum insured)
Example: Building insurance € 300,000.00 – € 15,000.00 deductibles
 Consequence: Although risks which have been uninsurable until now
will become insurable with compulsory insurance, it is nevertheless
possible that, in the event of damage or loss, insurance payments will
come under deductibles
 This information should not be conveyed to the citizens concerned
 Lack of acceptance / wave of lawsuits
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 116
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (8)
High administrative expenses / high operating costs
 Compliance with statutory insurance must be monitored; any
contraventions will require sanctions
 Sums insured must be specified in the first instance and then
constantly updated using considerable resources. Legally testable
documentation is required.
 Administrative costs will make premiums considerably more
expensive
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 117
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (9)
High equity capital requirements of insurers
 The volatility of catastrophe risks, combined with the equity capital
regulations for insurers – in particular the tightening of regulations
within Solvency II – means that there is a high equity capital
requirement, and therefore high capital costs
 Jumbo risk provisions for catastrophe risks are not permitted in law
 Allocation of claims equalisation reserves under IAS will not be
permitted in future
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 118
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (10)
Acceptance of state / tax-financed models (1)

The level of acceptance of state and / or tax high-performance
models will also be very low.

The state will have liability for all catastrophe events “from the first
euro and from the first day”.

The state will incur considerable administrative expenses and other
costs.
 The state would either have to develop its own system for
portfolio management and claims regulation or buy in the
necessary capacities from external service providers and then
control them accordingly.
 Necessary to set up a vehicle for capital accumulation
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 119
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (11)
Acceptance of state / tax-financed models (2)
 The introduction of government- or tax-financed models
represents a massive intervention in the market, although, in
principle, storm risk would be insurable everywhere and flood risk
insurable in 90% of populated territory.
 State solutions generally are likely to increase the public’s
expectations of the state and, in the area of catastrophe loss, have
a negative effect on possible prevention measures.
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 120
German Insurance Association
Catastrophe Insurance project in Germany
Assessment of the overall situation: the German view (12)
Status of political shaping of public opinion
The political bodies in Germany have decided not to introduce further
compulsory insurance.
The following reasons were crucial in the decision:
 The level of the necessary government guarantee of the order of € 22 billion
which is too big a burden on the public purse.
 Problems under constitutional law – problems which have been confirmed
particularly by the BMJ [German Minister of Justice].
 Concerns surrounding a lack of political acceptance by the population at
large represents a further problem.
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accounting requirements established by insurers or regulators in major EU countries
Page 121
German Insurance Association
- Catastrophe insurance in major EU countries -
Thank you for your attention
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 122
German Insurance Association
Agenda - Catastrophe insurance in major EU countries
 Starting position
 Examination of the European models
 Catastrophe Insurance project in Germany
 The product
 Risk potential and rates
 Actuarial models
 Rates and reinsurance
 Financial accounting and solvency
 Assessment of the overall situation
 Annex: Verification structure for catastrophe insurance
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 123
German Insurance Association
Catastrophe Insurance project in Germany
Verification structure for catastrophe insurance (1)
1. Starting position
1.1.





Risk situation on national territory
Events in the past (loss history)
Risk forecast / climate changes
PMLs of individual risks (storm, flood, storm tide, earthquake)
Actuarial instruments and underwriting policy
Supply and demand behaviour
1.2. Statutory framework conditions and catastrophe provision
 Statutory principles
 Building and building design regulations
 Catastrophe prevention (state – municipal and private risk provision)
 National and international financing instruments
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
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German Insurance Association
Catastrophe Insurance project in Germany
Verification structure for catastrophe insurance (2)
2. Theoretical principles
2.1. Actuarial conditions
 Insurance principles
 Insurance industry’s voluntary declaration of obligation
 Statutory insurance
2.2. Scope of insurance cover
 Insured risks
 Customer segments (private, commercial, industrial, infrastructure facilities)
 Insured objects (building, content, business interruption, transport, collision
damage, technical insurance)
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
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German Insurance Association
Catastrophe Insurance project in Germany
Verification structure for catastrophe insurance (3)
3. Model approaches for risk management
3.1. Cover capacities
 Exposure analysis and loss burden deductibles
 Original insurance market
 Reinsurance market
 Market solution – pooling solution – state financing
3.2. Underwriting model
 Structure and scope of exposures
 Facilities for preparation of contract
3.3. Risk financing
 Original insurance and reinsurance costs
 Claims equalisation reserve and major damage reserve
 Administrative costs
 Premium calculation
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 126
German Insurance Association
Catastrophe Insurance project in Germany
Verification structure for catastrophe insurance (4)
3. Model approaches for risk management
3.4. Product design
 Standalone or annex solution
 Insurance conditions
3.5. Risk management
 Additional state prevention measures
 Risk prevention through statutory regulations
 Loss prevention measures through the policyholder
 Crisis planning and management
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accounting requirements established by insurers or regulators in major EU countries
Page 127
German Insurance Association
- Catastrophe insurance in major EU countries -
Thank you for your attention
The legislations or regulations on catastrophe risks and the catastrophe insurance‘s
accounting requirements established by insurers or regulators in major EU countries
Page 128