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VIEWS: 100 PAGES: 80

									                             Policy Advice on

                  Insurance against Natural Catastrophes

This Project is funded by
the European Union                   A Project implemented by GDV


                                         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 sugges-
tions 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 insur-
      ance 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, do-
      mestically establishing a pool to underwrite jointly, or securitizing in the capital mar-
   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 in-
          surance? Do the insurers underwrite the cat risk by line or by package, or by other
       b) What are the risk transfer modes for cat risk insurance? Are the cat risks trans-
          ferred through international re-insurance, or through setting up cat risk pool in the

           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 ex-
   11. Address to the 2-day workshop in China.
   12. Jointly with other 2 experts, hold discussions with CIRC on the findings and offer pro-
       fessional 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,

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 Prov-
ince 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.

                              II.     Earthquake Insurance in Europe –
                                      Greece, Italy, Portugal and Turkey
                 A Survey for the Chinese Insurance Regulatory Commission (CIRC)

                                               Anselm Smolka1


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 popu-
lation 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 ob-
served: 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 country-
specific sections, together with the number of victims, economic and insured losses.

    Dr. Anselm Smolka, Munich Reinsurance Company,
       Operational Division: CUGC3-GEO
       D-80791 Munich
       Phone:+ 49 89 3891 – 5294
       Fax: + 49 89 3891 - 75294

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 dwell-
ings. 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 earth-
quake 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 build-
ings 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 fig-
ure 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

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.

    Figure 1: Earthquake Hazard Map of South Europe

1. Earthquake disasters

                                                   Deaths         Economic       Insured
 Date                Area affected                                losses         losses
                                                                  US$ m          US$ m
 1201                 Aegean Sea                       40,000                -             -
 Oct. 1491            Kos                               5,000                -             -
 01.04.1609          E Rhodes Island                   10,000                -             -
 07.06.1750           Peloponnese                       2,000                -             -
 16.02.1810           Crete                             2,000                -             -
 03.04.1881           Chios. Turkey, Cesme              7,886                -             -
                     W, Islands of Cephalonia,
 12.08.1953          Levkas, Sami, Zakynthos,               455           100              -
 30.04.1954          C, Thessalia                            25             3              -
 09.07.1956          SE, Santorin                            53            >5              -
 20.06.1978          N, Saloniki, Laganda                    50           250              -
 24.-25.2.1981       C, S, Corinth, Loutraki                 20           900              5
 10.03.1981          W, Preveza                               3             -              -
                     S, Peloponnes, esp.
 13.09.1986                                                  20           745              -
                     Kalamata, Eleochori
 13.05.1995           N, Kosani, Grevena                     26         >450             -
 15.06.1995          S, Gulf of Corinth, Egion               26           660            -
 07.09.1999          S, Athens (Plaka)                      143         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 propor-
tional 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 ma-
terial 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 in-
creased 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.


1. Earthquake disasters

  Date                    Area affected                   Deaths   Economic    Insured
                                                                   losses      losses
                                                                   US$ m       US$ m
  04.02.1169              S, Sicily                       14,000       -           -
  25.12.1222              Brescia                         12,000       -           -
  05.12.1456              Isernia, Benevent               30,000       -           -
  30.07.1627              Foggia                           5,000       -           -
  05.06.1688              Campania                        10,000       -           -
  11.01.1693              Catania, Siracusa               60,000       -           -
  08.09.1694               Irpinia                         6,500       -           -
  Jan. - Feb. 1703        Umbria                          10,000       -           -
  04.02.1783              Calabria                        29,000       -           -
  26.07.1805              Campobasso                       5,573       -           -
  14.08.1851              Melfi                              700       -           -
  16.12.1857              Basilicata                      12,300       -           -
  28.07.1883              Ischia                           2,317       -           -
  23.02.1887              Liguria                            640       -           -
  08.09.1905              S, Calabria region               5,000       -           -
  1906                    S, Calabria                        557       -
  1907                    S, Calabria                        167       -          -
  28.12.1908              S, Reggio di Calabria;          85,925         116      -
                          Sicily, Messina
  13.01.1915              C, Avezzano, Fucino             32,610          25      -
  1919                    Mugello                         est100      -           -
  1920                    Lunigiana, Garfagnana              171      -
  23.07.1930              Irpinia                          1,778      -           -
  15.01.1968              S, Sicily, Belice Valley           231        320       -
  06.05.1976              NE, Friuli region, esp.            965      3,600       -
                          Udine, Cordinone,
                          Gemona, Osoppo, Forgaria
  23.11.1980              S, Irpinia, Basilicata prov.,    2,914     11,800           40
                          Avellino, Potenza,
                          Salerno, Naples
  13.12.1990              S, Sicily E, Carlentini area        19        500       -
  26.09.1997              C, Umbria, Marche                   11      6,000              5
                          regions, esp. Assisi
  21.-22.03.,             C, Umbria, Marche, Val               2      -           -
  27.03.1998              Nerina, Colfiorito
  31.10./01.11.2002       S, C, San Giuliano di               29     est300       -
                          Puglia; Molise

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.


1. Earthquake disasters

 Date             Area affected                     Deaths      Economic          Insured
                                                                    losses          losses
                                                                  US$ m            US$ m
 1151             W, Lisboa                         >1,000               1         -
 1344             W, Lisboa                              -            est5               -
 24.08.1356       W, Lisboa                              -            est1               -
 26.01.1531       W, Lisboa                         30,000            >25          -
 28.01.1551       W, Lisboa                          2,000            est5         -
 01.11.1755       W, Lisboa                      est30,000            >25          -
 23.04.1909       W, near Benavente, Lisboa              -               -               -
 31.08.1926       W, Azores, Fayal, Horta               10         -               -
 14.05.1958       W, Azores, Horta                       -               5               -
 18.02.1964       W, Azores                              -           est25               -
 28.02.1969       S, Algarve                            11               2         -
 01.01.1980       W, Azores, esp. Terceira,             57              40         -
                  Fajal, Gaciosa
 09.07.1998       W, Azores, Fajal island,               10             70         -
                  Horta; Pico island

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

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)

  Hazard zone                      Rate in ‰,                     Rate in ‰,
                                   TSI < €5m                      TSI > €5m
  a                                0.6                            0.42
  b                                0.45                           0.32
  c                                0.2                            0.14
  d                                0.2                            0.14
  e                                0.2                            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                0%               10%               20%              30%
      5%                     1,0              0.85              0.75             0.65
     10%                     0.8              0.68               0.6             0.52

As reinsurance capacity is short, considerations are underway to introduce a pool solution in
order to create additional earthquake capacity.


1. Earthquake disasters

 Date                 Area affected                    Deaths    Economic        Insured
                                                                    losses         losses
                                                                   US$ m          US$ m
 11.10.1254           Erzincan                         15,000       -              -
 1268                 Kilikien (Silicia)               60,000       -              -
 1458                 Erzincan                         32,000       -              -
 14.09.1509           Istanbul, Izmit, Bolu, Edirne     5,000       -              -

12.06.1542       Thrace peninsula, Istanbul        4,500       -          -
1577             Balikesir district                   40       -          -
27.06.1583       Erzincan, eastern Anatolia       15,000       -          -
1598             Amasya, Black Sea               >60,000       -          -
Date             Area affected                    Deaths    Economic    Insured
                                                               losses     losses
                                                              US$ m      US$ m
21.06.1648       Istanbul                       est30,000      -          -
22.02.1653        Izmir                             5,000      -          -
24.11.1666       Erzincan                           1,500      -          -
17.08.1668       Bolu, Ankara                       7,800      -          -
10.07.1688       Izmir (Smyrna)                     5,000      -          -
25.02.1702       Denizli                           12,000      -          -
09.05.1717       Kayseri                            8,000      -          -
17.11.1717       Denizli                            6,000      -          -
25.5.1719        Izmit                              6,000      -          -
09.1723          Izmir                                450      -          -
29.07.1752       Edirne, Istanbul                     100      -          -
02.09.1754       Istanbul                             800      -          -
22.05.1766       Istanbul                           4,000      -          -
29.12.1776       Merzifon, Vezirköprü                 100      -          -
03.-05.07.1778   Izmir                                200      -          -
18.07.1784       Erzincan                          12,000      -          -
28.05.1789       South Anatolia, Harput,           51,000      -          -
03.04.1872       Antakya. Syria, Aleppo,           1,800       -         -
15.10.1883       Izmir, Cesme                     15,000       -         -
1891             Yalova, Istanbul                      -            -          -
09.03.1902       Cankiri                               4       -         -
28./29.4.1903    Malazgirt                         2,626       -         -
09.08.1912       Mürefte                             216       -         -
04.10.1914       Afyon-Bolvadin                      400       -         -
13.09.1924       Pasinler                            310       -         -
02.10.1926       Kars                                355       -         -
06.05.1930       Hakkari Siniri                    2,514       -         -
01.05.1935       Digor                               200       -         -
19.04.1938       Kirsehir                            149       -         -
26.12.1939       Erzincan                         32,962           20    -
10.09.1941       Van-Ercis                           194       -         -
20.12.1942       Niksar-Erbaa                      3,000       -         -

 20.06.1943           Adapazari-Hendek                     336         -             -
 26.11.1943           Tosya-Ladik Tosya-Ladik            2,824               25      -
 01.02.1944           Bolu-Gerede Bolu-Gerede            3,959               25      -
 31.5.1946            Varto-Hingis                         836         -             -
Date                 Area affected                       Deaths     Economic         Insured
                                                                         losses        losses
                                                                      US$ m           US$ m
 17.8.1949            Karliova                              450        -             -
 3.1.1952             Hasankale                             133        -             -
 18.3.1953            NW                                    265           >25        -
 19.8.1966            Varto                               2,400            35        -
 28.3.1970            Gediz                               1,086              9       -
 22.5.1971            Bingöl                                878              -       -
 6.9.1975             Lice, Diyarbakir                    2,385            17        -
 24.11.1976           Muradiye, Manisa, Caldiran          3,840            25        -
 30.10.1983           Anatolia E, Horasan                 1,346        -             -
 13.3.1992            Erzincan + Tunceli                    653           750            13
 1.10.1995            Dinar area, Evciler, Afyon             94           205        -
 27.6.1998            Ceyhan, Adana                         144           550            >1
 17.08.1999           Izmit, Istanbul, Gölcük, Sa-       15,000      12,000            600
                      karya, Yalova
 12.11.1999           Düzce, Adapazari                      845       est500             >40
 1.5.2003             Bingöl, Celtiksuyu                 est176        -             -

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    Zone 1       Zone 2       Zone 3            Zone 4          Zone 5
                      ‰            ‰            ‰                 ‰               ‰
 Steel or rein-
                           2.12         1.46             0.76              0.41          0.29
 forced concrete
 Brick/stone               4.44         3.00             1.53              0.59          0.41
 Others                    5.83         3.84             1.95              1.06          0.77

      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 es-
tablished with ´the assistance of the World Bank, professional reinsurers, reinsurance inter-
mediaries and private risk consultants.

At present, about two million policies have been sold. The scheme provides for basic cover-
age 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        Zone 1          Zone 2         Zone 3          Zone 4         Zone 5
 type                ‰               ‰              ‰               ‰              ‰
 Steel or rein-               2.00            1.4            0.75            0.5            0.4
 forced concrete
 Brick/stone                   3.5            2.5             1.3            0.5            0.4
 Others                       5.00            3.2             1.6            0.7            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.


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 per-
son acting on our behalf in the performance of our obligations cannot be blamed for intent or

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 con-
strued in accordance with German law.

                                    III.       Natural Disaster Insurance in Europe

                                           Stefan Richter and Rainer Schönberger

Gesamtverband der Deutschen Versicherungswirtschaft e.V.

Table of Contents ......................................................................Error! Bookmark not defined.19

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

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


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
      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 exist-
ing 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 com-
panies 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 insur-
ance 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 cir-
cumstances 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 solu-
tions, 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.

These difficulties could not be overcome even through continued evaluation of up-to-the-
minute 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 pos-
sible 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 locali-
ties 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, meteorolo-
gists 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

       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 lo-
        cal 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 cer-
tainty 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 conceiv-
able 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 re-
cent 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 consid-
erable 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 cli-
mate 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 representa-
tion 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 Fed-
eral Republic of Germany of +0.8°C to +1.0°C.

   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, North-
ern 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 21 st century which led
to different forecasts. All forecasts of the IPCC, however, show that temperature and precipi-
tation will, in fact, continue to change.

   Expected change in average global temperature until 2100

The graph below shows, in an exemplary way, the results of four model calculations in a co-
ordinate system. The most conservative of the four forecasts expects the average global tem-
perature to rise by +1°C in the 21st century, while the most extreme scenario predicts a rise of

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 com-
pensate for climate changes. However, all scenarios agree insofar as they predict a rise in

Combining the results of these models with the corresponding topographical data produces
the following:

   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.

   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 ef-
fects 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.

                                            Based on the global warming expected in the 21st
                                            century, the IPCC assumes a sea level rise of be-
                                            tween 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 Pa-
                                            cific 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 simu-
                                            lated a sea level rise in the Mediterranean Sea of
                                            +0.5 m and +1.0 m, using the Nile Delta as an

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 mil-
lion 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

of the volatility of these events and in no way represents a new trend. For Germany, this hy-
pothesis has been confirmed in an impressive way by the August 2002 floods.

     Number of events

    The graph shows the numer of major natural damage events for each year by type of event.         Number

      Earthquake, volcanic erup-         Flooding
      tion                               Other

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 exter-
      nal, supra-national aid in order to overcome the event.

GDV has evaluated the natural damage events covered by its member companies in the terri-
tory 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 natural damage events in Germany
Anzahl der Elementarschäden in der BRD







       19   19      19   19    19   19   19    19    19    19     19     19    19     19     19      20   20
       70   72      74   76    78   80   82    84    86    88     90     92    94     96     98      00   02

             Storm             Flooding                   Other (e.g. forest fires, winter damage,
                                                                   (u.a Wald- , Winter-
                                                          Sonstige .                                  ,
             Stur             Überschwem-                 avalanches, frost
                                                          Law- ,          brände schäden
             m                mung
             Hail              Earthquake                 inen Frost)
            Hage              Erdbe-
            l                 ben

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 cli-
mate 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 in-
surance 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, eco-
nomic losses and the expenditures of the insurance industry rise as well.

Munich Re obtained the following results in connection with its aforementioned study of ma-
jor 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)                               Trend of economic losses
   Thereof insured losses (in 2003 figures)                         Trend of insured losses
   Decades’ averages of economic losses

The graph shows the extreme events described above together with the economic losses sus-
tained 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 in-
sured 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             Comparison         Last 10 ; 1960’s
               1959 1969 1979 1989 1999 years                    of last 10
Number      of                                   60              with 1960’s                     2.2
                 20    27     47    63    91
events                                                           shows dra-
                                                                 matic rise
Economic                                                 514.5                                   6.7
                42.7    76.7   140.6   217.3    670.4
Insured                                                   83.6                                  13.5
                    -    6.2    13.1    27.4    126.0

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 in-
creased by a factor of 6.7 due to the accumulation of wealth by the population. Since insur-
ance 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 be-
tween 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 consider-
able 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

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.


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 rec-
oncile 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.

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 de-
velopment 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 reunifica-
tion 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 free-
       dom 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 monopo-
lies appeared necessary.

However, deregulation did not at all lead to the complete elimination of monopolistic struc-
tures. 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 author-
ity. In contrast, France and Spain maintained the monopolistic structures in a slightly modi-
fied form after the EU had accepted compromise proposals to this effect.

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 offi-
cially holds the view that, due to formal changes in the Consorcio de Compensación de Segu-
ros, 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 market-
oriented 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 associa-
tion, 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 eco-
nomic, 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 devel-
opments 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 com-
pulsory natural disaster insurance will also be examined.


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 ques-
tion 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 distribut-
ing 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 associ-
ated 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 ex-
treme 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 establish-
ment 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 automati-
cally “insured” against "disasters." However, owners are not prevented from obtaining sup-
plementary 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 obtain-
ing supplementary coverage of his or her own choice. In practice, however, this option is sel-
dom 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.

Coverage for Disasters

As stated above, the Consorcio offers comprehensive coverage for "disasters", which are de-
fined 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 politi-
cal 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
                                                                      Annual Report of the
      persons.                                                           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 Con-
sorcio 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 con-
tracts. 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

      1% surcharge on occupational insurance (occupational disability and death)

The Consorcio came to realize that this form of premium calculation basically involves prob-
lems. 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 re-
ported 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 insur-
ance 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 poli-
cyholder 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.

Policyholders are free to select the insurable value (replacement value, market value, auto-
matic 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 link-
age 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 in-
creased 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 gov-
  ernment 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 compul-
  sory 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.

Graphic Representation of the Consorcio de Compensación de Seguros

             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 with-
             out 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 in-
             dustry proposed the introduction of a maximum liability of £ 100,000 per attack. This meas-
             ure 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 insur-
             ance. 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 cover-
             age. 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 un-
             favourable 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 in-
                                      surers 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

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 au-
tumn 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 ob-
ject of the Agency's collaboration with the "Association of British Insurers (ABI)" was to en-
sure that the overwhelming majority of building owners have the option of obtaining insur-
ance coverage for flood risks.

To this end, the "Environment Agency" supplied insurance companies with data on the prob-
ability 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 guar-
antee 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 govern-
ment 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 preven-
tion 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 es-
tablishes 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 cus-
tomers. For risks in Category 3 existing customers are guaranteed that flood coverage will be

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 re-
viewing 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
      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

                                                           Temporary mobile flood wall Flut-

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

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 man-
agement ratios. Deductibles are also determined based on actuarial principles. This system
allows, for example, policyholders to save on premiums while freeing up funds for independ-
ent 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 pre-
vent 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 signifi-
cance 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 sta-
bility 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 insurabil-
ity 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.

 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


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 aforemen-
tioned models.

Natural Disaster Insurance Coverage with Government Reinsurance

Insurers operating in France are obligated by law to offer natural disaster coverage at a stan-
dard 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 Cen-
trale de Réassurance (CCR)." Of course, insurers also have the option of obtaining reinsur-
ance 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. In-
             surers 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 di-
             rect insurer in ceded business. The factor can be negotiated for each individual

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 im-

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 rein-
surance 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 in-
surer'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 an-
nual 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 premi-
ums 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 con-
tinue to increase. A changed underwriting policy of direct insurers might require further inter-
vention 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 natu-
ral disaster event whether the law applies. To this end, a commission has been created consist-
ing 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 mean-
ing 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 situa-
tion to this commission.

In principle, the commission concentrates on risks generally covered by natural disaster insur-
ance. 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 in-
fluences, so that the economic compensation by the system to be expected is difficult to

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 in-
sured 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 ob-
tain insurance for natural disasters as soon as they e.g. acquire a fire insurance policy. Policy-
holders 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 cov-
erage (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 insur-
ance 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, estab-
lished 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 gov-
ernment 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 accu-
mulation 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

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 comprehen-
       sive 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 poli-
       cyholders 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 disproportion-
       ately high premiums into CatNat without enjoying more comprehensive effective cov-
       erage. 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 cal-
culation 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 govern-

The franchise deductibles listed below currently apply, each per contract and per event:

      Building contents and non-commercial buildings (buildings with private use)
       -   EUR 380.00

      Company buildings (buildings for commercial or industrial use)
       -   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

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 fran-
chises, 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

Summary of the CatNat

 The CatNat system has proven unstable since its establishment. The reasons for this insta-
  bility 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
 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.

Graphic Overview of the CatNat


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 independ-
ently 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

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, Obwal-
den and the Duchy of Liechtenstein), only the private insurance industry offers natural disas-
ter coverage. This option has only been available to Swiss residents since the respective popu-
lar 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-
sents a typical market without any special mechanisms, so that monopolistic structures, sup-
ported by interference by the state, are not needed.

In order to master the financial aspects of natural disaster insurance, the private Swiss insur-
ance 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 pre-
mium 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

      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, in-
       cludes 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 insur-
ance at the replacement value: the disbursement equals the amount necessary in order to con-
struct 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 disas-
                                                            ter coverage is the risk of earth-
                                                            quakes. Both the cantonal build-
                                                            ing insurers and the private insur-
                                                            ance industry have established
                                                            separate independent pool sys-
                                                            tems for this risk providing funds
                                                            for earthquake claims:

      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 pre-
miums 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 ac-
cumulate these reserves. Therefore, in the medium term, the proportion between the premi-
ums 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 perma-
frost 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 influ-
enced by reserves due to subsidization of premiums cannot be evaluated here. However, mo-
nopolies 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 build-
ing 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 in-
       sured for comparable insurance coverage.
The deductibles of both systems must be based on Article 4 of the Swiss Natural Disaster Or-
dinance. 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.

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 policy-
holder 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 "Com-
munity 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 insti-
tutions 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 natu-
ral 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 individ-
ual 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 dis-
aster 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 calcu-
lation. The BPV shall approve the rates if they are appropriate for the risks and costs. The

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 (can-
  tonal) 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 insur-
  ers. Companies assign 85% of their natural disaster claim expenses to the pool, which dis-
  tributes 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, re-
  serves which are not available to the private insurance industry to the same degree. In ad-
  dition, 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 can-
  tonal 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 poli-
  cyholders 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 Fed-
  eral Office for Private Insurance. Therefore, the market is not completely deregulated in
  Cantons without cantonal building insuers.

Graphic Overview of the Swiss Model


Development in the Federal Republic of Germany

In the Federal Republic of Germany a two-tiered property insurance system, with both mo-
nopolies 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 es-
tablishment of the Federal Republic of Germany, some as early as 1676 (Hamburger Feuer-
kasse). 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 fun-
damental 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 com-
pensated 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 in-
                            dustry. 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.

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, par-
ticularly flood risks, in building and content insurance policies.

Of the insurance monopolies of the Federal Republic of Germany, only Badische Ge-
bäudeversicherung and Württembergische Gebäudeversicherung in the Federal State of Ba-
den-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 in-
surance 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 building-
fire 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 pri-
vate 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 de-
                                             tailed geological and statistical analysis of flood-
                                             ing risks in Germany, taking into account the re-
                                             sults of the analysis by introducing a zoning sys-


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 resid-
ing 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 con-
cerned and the respective risk leads, in actuarial terms, to the calculation of premiums based
on risk.

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

                                                     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 profes-
                                                     sionally reconciled with actual data of the
                                                     water management offices. In a later stage,
                                                     flood scenarios were simulated on a com-
                                                     puter. In the further course of work the re-
                                                     sults 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, in-
                                                     cluding the position of dikes and other pro-
                                                     tective facilities.

                                                               The ZÜRS river network

         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
      Zone 2: one event in 50-200
      Zone 3: one event in 10-50 years
      Zone 4: one event in less than 10

      The software includes three cen-
       tral elements, or "modules": the
       ZÜRS Viewer (visualization of areas) as
                                                                  ZÜRS Software (Viewer)
       well as the “Black Box" and
       "ZÜRS light” for automatic assignment
       of risk classes to address data.

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 esti-
mate flood risks in a qualified way. The software has been regularly updated since its initial

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 policy-
holder), 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 wa-
terways. Even today potentially at-risk areas are still inhabited. In such cases each policy-
holder 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 pre-
defined 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.

The Heavy Floods in August 2002

In August 2002, Central Europe was hit by
sustained heavy rainfall. This precipitation
                                                                                   Affected area
was concentrated especially in the smaller                                         Affected towns and cities
tributaries of the low mountain ranges, caus-                                      River affected by high
ing considerable damage in those areas in                                          water
the form of torrents (water, sludge and de-
bris). Due to the extensive area and quantity
of precipitation, the Elbe, Moldau and Da-
nube Rivers ultimately overflowed, causing
considerable damage24.
                                                                         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 cover-
       age 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 re-
       unification 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

Political Decision-Making Processes: 2002-2004

Because of this problem and in view of the high losses sustained, politicians resumed the de-
bate about whether compulsory insurance should be introduced for natural disaster risks.
"Compulsory insurance" was generally understood to mean a model according to which own-
ers 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 reg-
istered 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 poli-
cymakers 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“, “flood-
       ing“ 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 avail-
       able 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 fi-
       nancial 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 gen-
       eral 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 com-
       pliance with political specifications, as to their workability in practical implementation
       of natural disaster insurance. The Section entitled “Possible Models for Natural Disas-
       ter 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 specifica-
tions, 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

commercial buildings with an insured sum of up to EUR 5 million, based in each case on re-
placement 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

 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 fundamen-
tal 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. Tak-
ing 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 repre-
sent the entire claims burden of a period of 300 years. Total claims expenditure over that pe-
riod is the sum of individual rates of occurrence.

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 ex-
treme claim year, considering all natural disaster risks, is several times higher than the indi-
vidual 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 de-
termined for all natural disaster risks. The result of the calculations depends on e.g. how con-
servative 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 ma-
jority of the expected claims:

                                                                       bis zu 2 Mrd. EUR
                                                                       up to EUR 2 bn

                    Überschwemmung / Sturm

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 fol-
lowing 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

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

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 ade-
quacy 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 re-
       duce the PML, so that the residual claims burden for private insurers is ultimately re-
       duced 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 pri-
       vate insurance industry and expected maximum claims through a government guaran-
       tee; 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 ca-
pability 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

      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. Fur-
       thermore, an accumulation of events could lead to unacceptably low compensation
       amounts for policyholders (see the Swiss model). Finally, it would be practically im-
       possible for insurers to make partial payments in the event of disasters, since the ulti-
       mate 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.

      Since political bodies intended to introduce compulsory insurance for all natural disas-
       ter 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 ex-
       cluded 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 with-
       out 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: compen-
sation 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 private-
sector 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 con-
cept 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 "private-
sector 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 ex-
treme 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 in-
       surance 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 dis-
       advantages are to be expected in each case?

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 regionaliza-
       tion of the market. Regional centres have developed both in line with company devel-
       opment and due to acquisition of smaller insurance companies focusing on certain re-
       gions by larger companies. With the successor companies of the former insurance mo-
       nopolies this regional structure is especially pronounced. While these successor com-
       panies even today hold a market share in the building insurance sector in their respec-
       tive regions of up to 80 %, the regional market share of companies operating on a na-
       tionwide 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 disas-
       ter 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 dam-
       age 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 interna-
       tional 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 rein-
       surer which combines the risks of all companies in a homogeneous portfolio and thus

       balances them, which cannot be done by individual regional companies for the reasons
       stated. However, individual companies may – for example, through retrocession – par-
       ticipate 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 in-
       surance density is reduced by risk selection and that the system of balancing is made

Compulsory Insurance and Mandatory Coverage

Basically, two solutions are appropriate for the structure of compulsory natural disaster insur-
ance: general compulsory insurance or mandatory coverage.

A general compulsory insurance solution means that each building owner must obtain insur-
ance for natural disaster risks, regardless of whether the building is otherwise insured, e.g. for

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 sur-
charge 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 com-
       pulsory 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 insur-
       ance 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 de-
       tails 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 in-
       expensive 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. More-
       over, in the case of mandatory coverage, the policyholder would only have little inter-

       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 insur-
ers operating in Germany are merely subscription agents of the “special direct insurer”. The
graph below gives an overview of the “direct insurer model”:

                                                        Direct insurers operating in Germany
                                                         In Deutschland tätige Erst Versicherer
                                                        Portfolio management & -claim
     Contractual                                       Bestandsverwaltung & Schadenbearbeitung
                                                        Processing against commission
     relationship -
           Vertrags                                                 gegen Provision
                                                        Fixed price depending on und
                                                       Reglementierter Preis je Zone zoneRisiko-
                                                       art type of risk
        Spezial-Erst -Versicherer (AG)
       Special direct insurer (joint-stock com-


             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 charac-
teristics 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.

For the structure of reinsurance the following solution was envisaged:

                  „State guarantee“                                        2 Layer
                                                                          2. nd layer

       Reinsurance to Germandeutschen
       Rückversicherung an die
                                                                          1. Layer
                                                                           1 layer
       undinternational reinsurers
       and internationalen Rückversicherer

           Capacity provide by direct insurers
           Kapazität der Erstversicherer                                 Primary
                                                                      Primary layer
           (mit or without retrosssion)
           (with oder ohne Retrozession)

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 guaran-
tee 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 accord-
ingly capitalized. Alternatively, retrocession to direct insurers is conceivable. Through retro-
cession, 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 ret-
rocession is a proven instrument in reinsurance, it was included in further considerations, de-
pending 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 reinsur-
ance 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 in-
        volvement and financial capacity of individual insurance companies this could in ex-
        treme 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 ex-
        treme damage events would affect only the “special direct insurer”, but not the negoti-
        ating direct insurers. On the other hand, direct insurers only bear the limited risk due to
        retrocession of the “special direct insurer”.

      Since direct insurers do not include natural disaster risks in their own portfolios, the
       aforementioned additional capital requirements according to solvency rules do not ap-
       ply. 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 bil-
      The rating of companies has a direct influence on their capacity to act in capital mar-
       kets. 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 com-
       pulsory natural disaster insurance. Since, moreover, policymakers prefer inclusion of
       the “storm“ risk in compulsory natural disaster insurance, considerable losses of port-
       folio would be the consequence since all “storm portfolios” would have to be trans-
       ferred to the “special direct insurer”. In particular, legal intervention into the function-
       ing 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 be-
       tween insurers due to standardized premiums and standardized products. This would
       probably constitute a violation of European and national anti-trust law.

      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 – depend-
       ing on the structure of the data processing in place – involve considerable (consequen-
       tial) costs for policyholders.
      Also, for supervisory reasons and for its conduct of business the “special direct in-
       surer” 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 con-
tract. 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. zon-
ing, ZÜRS), portfolio management and settlement of natural disaster claims occurring. Al-
though, 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.

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” retro-
cedes 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 reinsur-
ance 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 ele-
       ment in a market which, as described above, shows marked regional differences. Fi-
       nally, 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 retroces-
       sion 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 accep-
tance and premiums are required. Since, however, direct insurers will take into account com-
pany-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.

Taking into account cash flows, the reinsurer model could ultimately be represented as fol-

 Building owners subject
to compulsory insurance

     Gross       premiums                    Interest on equity
to compulsory insurance
                            Gross premiums
             Alle                                  Elementar -
                                                 Natural disaster
     Gross       premiums                             on equity
      Direct insurers
      Erstversicherer                            Rückversicherer
                                                  Shareholders                State guarantee
to compulsory insurance
             Alle            Reinbursement         Elementar -
                                                 Natural disaster
                                               Administrative costs
     Gross - premiums
     Pflichtversicherte     Gross premiums            on equity
      Direct insurers        of costs            Rückversicherer
                                                  Anteilseigner               State guarantee
to compulsory insurance
             Alle            Reinbursement       Natural disaster .
                                              Sovency requirement
                                                   Elementar -
                                               Administrative costs
     Gross - premiums
     Pflichtversicherte     Gross premiums            on equity
      Direct insurers        of costs            Rückversicherer
                                                  Shareholders                Staatsgarantie
                                                                              State guarantee
to compulsory insurance                             nd
             Alle            Reinbursement         2. Layer -
                                                   2 layer
                                                 Natural disaster .
                                              Sovency requirement
                                               Administrative costs
     Gross - premiums
       Solvabilitäts -      Retro premiums
                            Gross premiums         (SB) equity
      Direct insurers
      Erstversicherer         of costs           Rückversicherer
                                                  Shareholders                Staatsgarantie
                                                                              State guarantee
to compulsory insurance
       anforderung :         incl. cost of           st               Reinsurance premium
                                                   1. Layer
                                                   1nd layer
             Alle            Reinbursement         2 layer -
                                                 Natural disaster .
                                              Sovency requirement
                                               Administrative costs
     Gross - premiums
       Solvabilitäts -
       Solvency                capital
                            Gross premiums         2. on equity
      Direct insurers
      Erstversicherer         of costs           Rückversicherer
                                                  Shareholders                State guarantee
to compulsory insurance
       anforderung :
       requirement                                 (SB)
                                                  Primary layer
                                                     st               Reinsurance premium
                                                   1nd layer
             Alle            Reinbursement         2 layer -
                                                 Natural disaster .
                                              Sovency requirement
                                                   1. Layer
                                               Administrative costs
     Gross - premiums
       Solvabilitäts -      Kapitalk
                            Gross premiums

Summary Description of the Problems Involved in Compulsory Insurance

In addition to the areas described above, both models, at various points, cause further prob-

 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 in-
   habited areas. Therefore, it is not likely that compulsory insurance will be received with
 The demand of policymakers for premiums based on risk without cross-subsidization
   leads to higher deductibles in exposed regions. Only through these high deductibles af-
   fordable 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 policy-
   holder to maintain and extend independent preventive measures. In exposed zones de-

       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 in-
       troduction 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 effec-
 The fact that the state introduces a compulsory insurance which is not based on the con-
   cept of protection of third-party victims but merely stipulates how an owner has to pro-
   tect his property is constitutionally objectionable.32

In light of the difficulties shown with respect to implementation of compulsory natural disas-
ter 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 in-
  habited 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
        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 natu-
ral disaster insurance.

Graphic Overview for Germany


     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)
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 provi-
sions 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;

The full document can be viewed under!celexapi!prod!CELEXnumdoc&lg=DE&numdoc=31992L0049&model=g
     Horts Dietz, Wohngebäudeversicherung, 2nd ed., Karlsruhe 1999, J 1.1
     Thomas von Ungern-Sternberg, Gebäudeversicherung in Europa, Bern 2002, p. 69
     Münchner Rück, Naturkatastrophen 2002

         Cantonal insurance monopolies in Switzerland:

           Aargauische Gebäudeversicherungsanstalt

           Assekuranz Appenzell AR

           Basellandschaftliche Gebäudeversicherung

           Gebäudeversicherung Bern

           Etablisement cantonal d'assurance des bâtiments ECAB

           Kantonale Sachversicherung Glarus

           Gebäudeversicherung des Kantons Graubünden GVA

           Assurance immobilière du Jura

           Gebäudeversicherung des Kantons Luzern GVL

           Etablisement cantonal d'assurance immobilière

           Nidwaldner Sachversicherung

           Solothurnische Gebäudeversicherung SGV

           Gebäudeversicherungsanstalt des Kantons St. Gallen GVA

           Etablisement cantonal d'assurance du canton de Vaud ECA

           Gebäudeversicherung Kanton Zürich GVZ

           Gebäudeversicherung des Kantons Zug
         Thomas von Ungern-Sternberg, Gebäudeversicherung in Europa, Bern 2002, pp. 125 et seq.
         Cf e.g.

     As per 23 February 2004: 1 Swiss franc = 0.63 EUR
     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.
     The time of application must be flexible because, due to changes in the market, it cannot be guaranteed that the insur-
     ance industry can provide EUR 8 billion each year. These changes may particularly involve the reinsurance market
     (costs, capacity).
     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).
     Furthermore, the introduction of compulsory insurance would constitute the creation of a monopoly which is inadmissi-
     ble 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
     Compulsory insurance, depending on its structures, does not necessarily involve that prevention or independent meas-
     ures 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.
     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 indi-
     vidual parameters are inadmissible (e.g. ZÜRS).
     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 dam-
     age, 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.

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 ac-
counting requirements established by insurers or regulators in major EU countries

Appendix 2 :
Margarita Antonaki,

Greece – Cover of Natural Catastrophes


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