Title: The legislations or regulations on catastrophe risks and the catastrophe insurances accounting requi
1The legislations or regulations on catastrophe
risks and the catastrophe insurances accounting
requirements established by insurers or
regulators in major EU countries
- Stefan Richter / Rainer SchönbergerGerman
Insurance Association
2Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial reporting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
3Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial reporting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
4Starting position (1)
- Large increase in extreme events
- Intensity of events steadily increasing
- Disproportionate rise in losses through
- Increased settlement of exposed areas
- Progressive concentration of assets
- Expansion of basement space and technical
equipment below ground level - Climate change
- Actuarial situation
- Low insurance dispersion due to lack of
demand(problem of negative selection) - Decline in insurance services for exposed areas
- Cutbacks and price increases in reinsurance
capacities - Increase in insurance premiums
5Starting position (2)
1.1 Past events
Number of emergency losses in Germany since 1970
30
25
20
15
10
5
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Miscellaneous (e.g. forest fires, avalanches,
frost)
Storm
Flooding
Earthquake
Hail
6Starting position (3)
1.1 Past events
Economic losses (euro millions)
adjusted for inflation
7Starting position (4)
1.1 Past events
Insured losses (euro millions)
3.2 bill.
2,500
2,000
1,500
1,000
500
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
adjusted for inflation
8Starting position (5)Worldwide climate changes
- Global effects ( IPCC document )
- Increase of 0.6 to 0.8 degrees Celsius in average
temperature of earths surface in the 20th
century - Model calculations for the 21st century show a
temperature increase of between 1.4 and 5.8
degrees Celsius - Rise in sea level by 0.09 to 0.88 metres
- Retreat of glaciers and thawing of permafrost
soils - Increase in floods and droughts
- Higher maximum temperatures more hot days and
heat waves - Higher minimum temperatures fewer cold days,
but increase in cold spells - IPCC Inter-governmental panel for climate change
9Starting position (6) Effects of global climate
change - temperature
1.2. Climate changes
- Increase in global average temperature in the
21st century for the northern hemisphere and the
polar regions there between2 C and 6 C. -
Increased ice melting - Rise in sea level
10Starting position (7) Effects of climate change
worldwide precipitations
1.2. Climate changes
- Increase in precipitations in the Asiatic region
by up to 1.5 mm per day - In connection with the increase in temperature,
the climate cycle is increasingly being fuelled
with energy which will manifest itself in
distinctive weather phenomena
11Starting position (8) Effects of climate change
worldwide sea level
1.2. Climate changes
- Depending on the model calculation, the IPCC,
based on forecasts for global warming in the 21st
century, anticipates an increase in sea level of
between 40 cm and 60 cm. - The increase forecast means that settlement will
no longer be possible in some regions. - Even the most conservative model calculation
shows that numerous islands in the South Seas
(e.g. Tuvalu) will be flooded, and consequently
will no longer be habitable.
12Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial reporting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
13Examination of the European models
(1)Introduction
- Storm and temperature insurance in the following
countries will be looked at - France
- Spain
- Switzerland
- Federal Republic of Germany
- The following will be highlighted
- Structure
- Functionality
- Strengths and weaknesses
- The strengths and weaknesses of the German system
will be shown using the flood catastrophe of
August 2002 as an example
14Examination of the European models (2) France -
Structure
Government(CCR)
Reinsurance
Insurance industry
- Proportional RI- RI with unlimited liability
.............
Statespecifiedstandardpremium
Policyholder
PrivateReinsurer
Mandatory for - assets and vehicles - as soon
as they are insuredagainst other risks
Caisse Centrale de Réassurance
15Examination of the European models (3)France
Functionality (1)
- By law, the French government and the private
insurance industry are to insure natural disaster
and storm risks jointly. However, the private
insurance industry bears the risk, manages the
insurance portfolios and settles claims. - Catastrophe insurance can be provided as a
general obligation, or as a compulsory addition
to basic cover. France has opted for the
compulsory route. Insurance is mandatory for all
assets and land vehicles which are insured
against fire, other risks or loss of
business. - The state specifies a standard premium, except
for the "storm" risk, which is a percentage of
the basic insurance premium (e.g. for fire
insurance). The same is true for deductibles.
16Examination of the European models (4)France
Functionality (2)
- The state provides insurers with reinsurance
capacity in two forms - proportional reinsurance or
- reinsurance with an unlimited state guarantee.
- The proportional reinsurance rates and direct
insurer deductibles have had to be raised in the
past in order to keep the state-owned reinsurer
Caisse Centrale de Réassurance (CCR) solvent.
17Examination of the European models (5)France
Strengths and weaknesses
- The CatNat system has proved to be unstable since
its establishment. The main reasons for this
instability are - politically motivated interference with claim
payments and system design - the conduct of the state reinsurer CCR, which, in
an attempt to improve its economic position by
offering low premiums, merely succeeded in
accumulating exposed risks, thus destabilising
the system of comprehensive cross-subsidies and
the model as a whole.
18Examination of the European models (6)Spain -
Structure
Premium
Federal CatNat insurerConsorcio
Insurance industry
Refund of expenses
Encashment
Adjustmentof claim
Policyholder
Mandatory insurance - buildings and movables
- - motor vehicles - - accident -
19Examination of the European models (7)Spain
Functionality (1)
- From the systematic point of view, the Consorcio
does not constitute a general compulsory
insurance, but mandatory coverage. - Despite the formal changes introduced in the
course of deregulation, the Consorcio remains
Spains government insurance monopoly for
natural disasters. - The Consorcio offers compensation for natural
disasters, as well as losses with political or
social causes (terrorism, unrest etc.).
20Examination of the European models (8)Spain
Functionality (2)
- The Consorcio charges "levies" for numerous
property insurance contracts in the form of
"levy rates" (these are in fact premium rates) - The "levy" (insurance premium) is mandatory for
buildings, building contents, vehicles and
persons. - Standardised premium rates and deductibles
apply. - Claims settlement is performed by the Consorcio
itself. Premiums are collected by private
insurers in return for reimbursement of costs.
21Examination of the European models (9)Spain
Strengths and weaknesses (1)
- The restructuring of the Consorcio into an
independent public company subordinated to the
Finance/Economics Ministry did not alter the
monopolistic character of this system. - This assumption is supported by the fact that, in
practice, policyholders are refused access to
private alternatives (double insurance since
the levy to the Consorcio is not dispensed
with). -
22Examination of the European models (10)Spain
Strengths and weaknesses (2)
- The system does not contain any incentives for
prevention. Rather, it encourages policyholders
to place their trust entirely in compensation in
the event of a loss. - Due to a lack of reinsurance and risk-related
premiums, the system will become unstable as
extreme events become more frequent - Losses and insured values will increase
- Losses and increases in levies will spiral
- This cycle can only be broken through the
introduction of structural changes, e.g. by
encouraging prevention
23Examination of the European models
(11)Switzerland - Structure
7 Swiss cantons
19 Swiss cantons
Private Insurance industry pool
Government
A/B/Cassign 85 of claims
Cantonalmonopolyinsurer
Pool allocates to A, B, C
Insurer A
Insurer B
Insurer C
Policy-holder
.............
Policyholder
Standard premium
24Examination of the European models
(12)Switzerland Functionality (1)
- Switzerland systematically chose general
compulsory insurance rather than mandatory cover. - There is no standardised national system in
Switzerland for natural disaster insurance. - In some of the Swiss cantons, the public cantonal
building insurers (KGV) offer natural disaster
coverage as monopolies, while the private
insurance industry offers such coverage in
others. - Each building owner is under an obligation to
take out insurance not only against the usual
risks (fire, storm, hail), but also against
natural disaster risks (flooding, avalanches,
snow pressure, landslides, rock slides).
25Examination of the European models
(13)Switzerland Functionality (2)
- Risks are balanced within the private insurance
industry through a pool of private insurers. - Companies assign 85 of their natural disaster
claim expenses to the pool, which distributes the
claims burden across all of the pool members in
proportion to the premium revenue of the relevant
company. The private insurance sector is thus
able to meet its obligation of compensation for
losses. - On the other hand, the public cantonal building
insurers rely solely on the extensive financial
reserves they have accumulated in the past
26Examination of the European models
(14)Switzerland Strengths and weaknesses
- The private insurance sector is restricted to 7
of the 26 cantons. These 7 cantons, however, do
not reflect the risk situation of Switzerlands
federal territory. The opportunities for the
private insurance sector to spread risk
adequately are therefore heavily restricted. - Switzerlands system does not offer a
comprehensive solution for loss through
catastrophe, as the policyholder, by virtue of
limited liability to 25 million CHF per case of
loss and 250 million CHF per event (for all
losses !) must, in the event of doubt, bear the
costs for a portion of the loss himself. This
applies to both private and cantonal insurers.
27Examination of the European models(15) Germany -
Structure
Government
Private Insurance industry
At present, not involved
Demand
Supply
Premium
Claims adjustment
Policyholder
28Examination of the European models(16)Germany
Functionality (1)
- The insurance market in the Federal Republic of
Germany has been deregulated since 1994, so that
insurance for natural risks is offered by the
private insurance industry rather than by a state
monopoly. - The Special Terms and Conditions of the private
insurance industry only covered the following
risks - Flooding (including heavy rains, pressurised
water and backwater) - Earthquakes, land subsidence, landslides
- Snow pressure, avalanches
- Volcanic eruptions
- Storm
29Examination of the European models(17)Germany
Functionality (2)
- Insurance is voluntary.
- The scope covers approx. 90 of inhabited areas
however, due to the general publics lack of
awareness of risk demand, it is modest. - There are no standard premium rates or
deductibles insurers must calculate them using
statistical data and management ratios. - Because each risk has to be assessed on a
case-by-case basis using statistical data, the
zoning system ZÜRS has become an important
element of catastrophe insurance in Germany.
30Examination of the European models (18)Germany
Functionality - ZÜRS (1)
- ZÜRS (Z)onierungssystem für (Ü)berschwemmung,
(R)ückstau und (S)tarkregen zoning system for
floods, backwater and heavy rains - ZÜRS provides an underwriting tool for the
insurance industry which helps it to assess flood
risk and offer a risk-related premium. - At the heart of the ZÜRS system is a database
which uses address information (road network,
house number data etc.) to show the risk of
flooding for any requested area. - ZÜRS is used as a technical basis for future
automated zoning systems (e.g. earthquake zones)
31Examination of the European models (19)Germany
Functionality - ZÜRS (2)
- The ZÜRS software modules
- Three modules ZÜRS Viewer, Blackbox and ZÜRS
light database - Modules are adapted to their intended use, e.g.
- ZÜRS Viewer with graphic output at point-of-sale
- Blackbox for batch processing of small-scale
volumes of data at branch offices - ZÜRS light database for implementation of the
data in the insurance industrys mainframe
computers. Automated data interrogation possible
for the official in charge.
32Examination of the European models (20)Germany
Functionality - ZÜRS (3)
Data basisDigital elevation model
Digital terrain model
Digital terrain model as basis of
work Extraction of elevation models from the
terrain model Creation of an elevation for
Germany
Digital elevation model
33Examination of the European models (21)Germany
Functionality - ZÜRS (4)
Data basisWaterway network
High degree of accuracy 1st and 2nd
orderwaterways flood-affected small-scale
waterways recorded 50,000 kilometres of waterways
are digitised
34Examination of the European models(22)Germany
Functionality - ZÜRS (5)
Calculation offlood areas
- Hydrology
- - Specification of flood drainage
- 2. Statistics
- - Specification of basis for water quantity
assessment - 3. Hydraulics- Location calculation
(drainage quantity, valley profile, roughness,
speed, drop)- Narrow simulation grid
35Examination of the European models (23)Germany
Functionality - ZÜRS (6)
Calculation offlood areas
- 10-yearly flood
- 50-yearly flood
- 200-yearly flood
- Co-ordination with the water economy
- Printout of results on analogue maps
- Visit to
- 200 water authorities
- Increased quality through
- Consideration of anthropogenic influences
- Incorporation of events that have actually
occurred - Consideration of more accurate calculations
36Examination of the European models (24)Germany
Functionality - ZÜRS (7)
Zone division in ZÜRS 2004
- GK 4, high threat
- Statistically, flood at least once every 10 years
- GK 3, medium threat
- Statistically, flood at least once every 10-50
years - GK 2, low threat
- Statistically, flood at leastonce every 50-200
years - GK 1, very low threat
- Statistically, flood less frequent than once
every 200 years
GK1
GK4
GK2
GK3
37Examination of the European models (25) -
GermanyStrengths and weaknesses using the flood
of August 2002 as an example
- In 2002, the Federal Republic of Germany was
affected by an extreme flood event - At the time,
- only 5 of buildings and
- 10 of household goods in Germany were covered by
catastrophe insurance, - even though insurance could have been taken out
for around 90 of the areas concerned. - The German system suffers from the fact that
supply and demand have no common ground. - Despite the substantial economic losses incurred
by the flood catastrophe, demand remained low(?
suppression of risk)
38Examination of the European models (26)
GermanyStrengths and weaknesses using the flood
of August 2002 as an example
- Degree of economic loss
- Heaviest precipitations since weather records
began in 1896 - Total loss 9.1 billion (not including
flood-related loss of earnings) - Commercial areas affected businesses, industry,
trade, inland waterway transportation,
agriculture, tourism, infrastructure (roads,
bridges, sections of railway line, power supply
etc.) - Environmental damage as a consequence of heavy
pollution of waterways
39Examination of the European models (27)
Germany Strengths and weaknesses using the flood
of August 2002 as an example
- Loss areas involved
- Infrastructure of Länder and municipalities
3.316 billion - Private households (residential buildings and
household goods) 2.547 billion - Commercial activity 1.438 billion
- Federal infrastructure1 1.353 billion
- Intervention and catastrophe prevention costs in
the Länder 0.224 billion - Agriculture 0.192 billion
- 1 Bahn AG facilities, federal motorways,
federal highways, federal waterways,
government-owned property, as well as the costs
for the deployment of over 73,000 workers drawn
from the Technisches Hilfswerk relief
organisation, the armed forces and the Federal
Border Police
40Examination of the European models (28)
Germany Strengths and weaknesses using the flood
of August 2002 as an example
- Problems caused by state financing of flood
damage - The state paid out substantial subsidies to
citizens affected by the flood in 2002 - However, continual compensation through state
subsidies whenever catastrophes occur is causing
considerable problems - A large number of claims (municipal and district
authorities, regional and federal ministries,
Reconstruction Loan Corporation, Deutsche
Ausgleichsbank and other institutions) - Parallelism of administrative procedures
- Rapid, unbureaucratic aid was severely hampered
- Release of funds slow as a result
41Examination of the European models (29)
GermanyStrengths and weaknesses using the flood
of August 2002 as an example
- Problems caused by state financing for flood
damage (contd) - Question Can financing of flood damage through
taxation be justified? - Equal status of insured and uninsured change of
moral risk? - The insured could have saved their premiums
- Critically important that insurance compensation
is put before state reimbursement - Question State help only in the event of major
damage events?
42Examination of the European models (30)
GermanyStrengths and weaknesses using the flood
of August 2002 as an example
- Economic need for action - conclusion
- Distribution discussion ex post leads to high
degree of uncertainty among affected parties(no
contractual regulation such as contracts of
insurance) - A large number of parties involved means a
less-efficient solution (in addition to the lack
of a general framework and non-existent
experience of handling of damages) - Parallelism of voluntary private provision and
extensive public aid(leads to displacement of
private insurance with a higher requirement for
public resources) - ? Development of a concept from the economic
aspect is required
43Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial accounting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
44Catastrophe Insurance project in GermanyProject
commission
- Preliminary considerations
- on the extent of insurance cover(product design,
risks, deductibles etc.) - on risk potential, rates and reinsurance
- Development of actuarial models
- based on obligatory insurance
- or in the form of compulsory insurance
- The following will also be examined
- Original insurer model
- Reinsurer model
45Catastrophe Insurance project in GermanyProduct
(1)
- Insured risks
- Flood / heavy rains / backwater / pressurised
water (natural cause) - Storm tide
- Earthquake(fire due to earthquake is also
covered) - Landslide(natural collapse of ground above
natural hollow spaces) - Landslip
- Snow pressure / avalanches
- Storm / hail
46Catastrophe Insurance project in Germany Product
(2)
- Uninsured risks
- Cavity following drought
- Gradual damage, etc.
- Volcanic eruption
- Meteorite impact
- Standard exclusions(political risks, including
acts of terror, fire etc., nuclear power, mains
water, frost, lightning, short circuit and excess
voltage damage)
47Catastrophe Insurance project in Germany Product
(3)
- Insured objects
- Buildings used for housing purposes (minimum
50), including neighbouring buildings - ? Backup definition of the term building
- Buildings with primarily commercial (but also
agricultural) use up to 5 million sum insured - Cost item limited to 10 of the indemnification
limit up to a maximum of 100,000
48Catastrophe Insurance project in Germany Backup
Definition of the term building
- A building is a spatial enclosure designed for
the protection of persons, animals or objects
against the effects of weather. Permanently fixed
to the ground, it is sufficiently stable to
permit the accommodation of persons. - Necessary accessories such as sanitary, heating,
water and electrical installations, built-in
kitchen furniture and neighbouring buildings
(e.g. garages, car ports or garden sheds) are
included in building insurance cover
49Catastrophe Insurance project in Germany Product
(5)
- Uninsured objects / damage
- Buildings not ready for use(first-time purchase)
- Buildings earmarked for demolition
- Contents, BU (Berufsunfähigkeit? occupational
disability) - Isolated special-purpose buildings (allotment
sheds, field barns, etc.)
50Catastrophe Insurance project in Germany Product
(6)
- Insurable value
- Reinstatement value with dynamisation
- Procedures still need to be developed for binding
arrangements in individual cases and on how to
handle changes in assets where a total limit
applies - Deductibles
- Exposed risks (ZÜRS zones III and IV storm tide,
earthquake)Deductible of 5 of sum insured,
min. 5,000, max. 50,000 per event and place
of insurance. - Non-exposed risks deductible of 0.5 of sum
insured, min. 500, max. 5,000 per event and
place of insurance.
51Catastrophe Insurance project in Germany Product
(7)
- Event definition
- Risk of flood 168 hours
- All other risks 72 hours
- Subject to approval of reinsurers
- Cost unit rate of product
- Operating, claims processing and commission costs
should be taken into account - Savings can be generated by using existing
structures in acquisition and administration - Capital costs must be considered separately.
52Catastrophe Insurance project in Germany Product
(8)
- Premium adjustment clause
- Premium-related consideration of rising claims
expenditure, climate change and risk of error. - Designed without a threshold value
- Premium adjustment clause
- Necessary in order to be able to respond to
unexpected developments, e.g. in individual cases
of damage. - Sustainability and control
- Sustainability and control must be ensured by
local authority areas. - Time of implementation
- Duration of implementation about 2 years after
law comes into force.
53Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial accounting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
54Catastrophe Insurance project in Germany Risk
potential and rates (1)
- Assessment of total insurance portfolio
- All residential buildings
- Commercial buildings up to 5 million
- Commercial buildings include buildings used for
agricultural purposes - The current portfolio for fire is being assessed
(in the case of fire, there is almost 100
insurance dispersion) - Sources Industry and risk statistics
- Estimate of model-related sum insured ca. 8.5
billion - Based essentially on sliding replacement value
insurance
55Catastrophe Insurance project in Germany Risk
potential and rates (2)
- Deductibles model per case of damage /
policyholder - For exposed risks
- 5 of sum insured, minimum 5,000, maximum
50,000 - Flood zones 3 and 4 in accordance with ZÜRS 2004
- Earthquake earthquake zone 3
- Storm tide storm tide zone
- For all other risks
- 0.5 of sum insured, minimum 500, maximum
5,000 - Note If property relating to one risk is
assessed as exposed, then the high deductible is
only applied to that risk!
56Catastrophe Insurance project in Germany Risk
potential and rates (3)
Estimate of risk potential Simulation / Flooding
Computer-generated three-dimensional elevation
models, with addition ofconcentration of assets
Extent of flood using inflows, outflows and
contour lines
Extent of flood taking into account embankments,
weir etc.
57Catastrophe Insurance project in Germany Risk
potential and rates (4)
Estimate of risk potential Simulation /
Earthquake
Analysis of damage events(epicentres, causes and
effects)
Simulation, taking into account tectonic
structures and geophysical research results
Analysis of tectonic measurement data
58Catastrophe Insurance project in Germany Risk
potential and rates (5)
- Estimate of risk potential
- Applied models
- Internal simulation systems of reinsurers
Münchner Rück and Swiss Re - Commercially available systems
- EQECAT
- RMS (no model available in Germany for flooding /
earthquakes Storm Clear deviations from other
models, little suitable data) - The results in the simulation systems were in a
manageable range? sufficient validity of
findings
59Catastrophe Insurance project in Germany Risk
potential and rates (6)
- Estimate of risk potential
- Classification by
- CRESTA zone (earthquakes)
- The CRESTA (Catastrophe Risk Evaluating and
Standardising Target Accumulations) zone data is
based on the zoning system established by the
world's leading reinsurers. - Based primarily on the observed or expected
seismic activity within a country, CRESTA zones
consider the distribution of insured values
within a country as well as administrative or
political boundaries for easier assessment of
risks. - Postcode areas in Germany
- Classification by postcode area permits a more
detailed examination per territory of the Federal
Republic of Germany than would be possible by
just taking into account the CRESTA zones
60Catastrophe Insurance project in Germany Risk
potential and rates (7)
- Estimate of risk potential
- Calculation using meteorological, hydrological
and seismological models - Calculations of the various reinsurers involved
and results of various suppliers of software for
cumulative estimate - Based on international custom, the figures 200
and 300 were used as yearly units. - Between 200 and 300 years there is a clear
increase in potential - Varying estimates of discharge effects through
deductibles with extreme events extend the margin
of estimates - A year takes the reciprocal of the probability of
one year being exceeded, i.e. a level x event
occurs with probability p within a (calendar)
year.
61Catastrophe Insurance project in Germany Risk
potential and rates (8)
- Risk potential Storm excluding deductible
- 200-year 7 9 billion
- 300-year 9 12 billion
- Risk potential Storm with deductible model
- 200-year 3.8 5.5 billion
- 300-year 5.5 8.5 billion
- Notes
- The yearly PML is higher
- Realistic worst-case scenarios not possible
- Increasing probability of occurrence (climate
change)
62Catastrophe Insurance project in Germany Risk
potential and rates (9)
- Risk potential Flood excluding deductible
- 200-year 7.5 10 billion
- 300-year 9 12 billion
- Risk potential Flood with deductible model
- 200-year 5.5 8 billion
- 300-year 6.5 9.5 billion
- Notes
- The yearly PML is higher
- Realistic worst-case scenarios not possible
- Increasing probability of occurrence (climate
change)
63Catastrophe Insurance project in Germany Risk
potential and rates (10)
- Risk potential Earthquake excluding deductible
- 200-year 6.5 9 billion
- 300-year 9 12 billion
- Risk potential Earthquake with deductible model
- 200-year 5 8 billion
- 300-year 7 10.5 billion
- Note
- Realistic worst-case scenarios not possible
64Catastrophe Insurance project in Germany Risk
potential and rates (11)
- Risk potential Storm tide
- Revision of existing scenarios ( 10-20 billion)
carried out by the storm tide working party of
the GDV. The studies are not yet complete. - Risk potential Other risks under 1 billion
65Catastrophe Insurance project in Germany Risk
potential and rates (12)
- Notes on risk potential
- Individual risk potential is calculated on an
event basis - The yearly PML can be above the PML of the
individual event - The loss burden must be added for the PML event
- Because of volatility, several events can
accumulate per year - Events can also occur in correlation to one
another
66Catastrophe Insurance project in Germany Risk
potential and rates (13)
- Conclusions from risk potential
- In order to ensure adequate cover for the
scenarios illustrated, an annual capacity of 30
billion is required for the Federal Republic of
Germany. - However, only 6-8 billion in capacities is
available in the private sector in the Federal
Republic of Germany. - In order to cover the shortfall, a government
guarantee of 22 billion is required
Capacities of original insurers and reinsurers
operating in Germany
67Catastrophe Insurance project in Germany Backup
Purchasing reinsurance (1)
- Based on a government guarantee, the following
aspects should be taken into account when
purchasing reinsurance by line - By line purchasing distinguishes between risks
- Targeted purchasing is possible
- Higher capacities are available
- One-off replenishment per capacity is usual and
available on the market at favourable cost - Similarly, however, the government guarantee
would have to be shown per risk. - However, this conceals the risk that, in cases of
extreme damage, the financial resources of a risk
line would be exhausted, while the funds for
other lines remain untouched. - A capacity shortfall could be avoided if each
risk line were afforded a maximum capacity of
22 billion however, there is no discernible
political will at present in this respect.
68Catastrophe Insurance project in Germany Backup
Purchasing reinsurance (2)
- Purchasing reinsurance as a package
- Package purchasing is the simpler solution
- Only limited capacities available on the market
- However, because of the difficulties described
with reinsurance by line, package reassurance
is preferred
69Catastrophe Insurance project in Germany Risk
potential and rates (14)
- Annual expected loss
- Calculation of expected loss is based on models
- The various estimates of event loss distribution
are systematically assumed - Method-constant procedure The mean value of the
estimates was systematically taken - Plausibility checks with various risk insurance
rates or GDV studies
70Catastrophe Insurance project in Germany Risk
potential and rates (15)
- Estimate of gross premium incomeTotal budget
excluding storm tide - The following expenditure should be taken into
account - Risk premium
- Balance of reinsurance
- Equity capital costs
- Administrative costs
- Total gross premium is roughly 3.3 billion over
about 18.5 million contracts - This represents a gross contribution rate of
around 0.40 in relation to the building values
represented
- Expected profit
- Safety loading
- Severe loss reserve
- ...
71Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial accounting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
72Catastrophe Insurance project in Germany
Actuarial models (1)
- The following steps were taken
- Investigation and decision about which insurance
system is to be used - Compulsory insurance system, or
- Compulsory contributions system
-
- Investigation and decision about which insurance
model is preferred within the chosen system - The original insurer model, or
- The reinsurer model
73Catastrophe Insurance project in Germany
Actuarial models (2)
- Definition of terms
- Compulsory insurance
- For the regulation existing in accordance with
the law governing compulsory insurance, a
corresponding insurance policy must be taken out
by the owner for an object defined in law. - Compulsory contributions
- A statutory obligation to take out catastrophe
insurance only exists if the policyholder takes
out a policy for specific, statutorily-defined
basic risks where catastrophe insurance is
mandatory.
74Catastrophe Insurance project in Germany
Actuarial models (3)
- Compulsory insurance (1)
- Advantages of compulsory insurance
- As a general obligation exists for insurance,
market density of 100 is guaranteed - Policyholders cannot escape this obligation by
the fact that they no longer take out basic
insurance - Compulsory insurance can be offered as a separate
product by a large number of insurers
75Catastrophe Insurance project in Germany
Actuarial models (4)
- Compulsory insurance (2)
- Disadvantages of compulsory insurance
- The system has to be sustained and controlled by
the government at high administrative cost in
order that the objects defined by law are
actually insured - Designing this as a separate product results in a
higher cost burden (e.g. IT, administration
costs, operating costs) - The higher costs lead, in turn, to a further
burden on insurers and premium payers alike
76Catastrophe Insurance project in Germany
Actuarial models (5)
- Compulsory contributions (1)
- Make-up of compulsory contributions
- Mandatory insurance against force majeure risks
for residential buildings, as well as for
buildings used for commercial and agricultural
purposes. - Premium is made as a surcharge for fire insurance
(possible as a percentage surcharge or as a
premium rate the latter solution offers more
adequate risk management, as the fire insurance
premium does not represent a basis for
calculating force majeure risks)
77Catastrophe Insurance project in Germany
Actuarial models (6)
- Compulsory contributions (2)
- Compulsory contributions offer the following
advantages - Portfolio management is simpler and more
cost-effective as no additional contract has to
be entered into. This means that both insurers
and premium payers are spared additional costs. - Existing catastrophe insurance contracts could be
transferred (since, in most cases, they are
maintained as an annex to fire insurance in the
portfolios) - The high level of bureaucracy involved in
sustaining and controlling compulsory insurance
no longer applies
78Catastrophe Insurance project in Germany
Actuarial models (7)
- Result of examination of the insurance system
- The political climate supports compulsory
insurance for the following reasons - Fear that insurers will change their acceptance
behaviour on underwriting basic cover - Non-existence of 100 market cover with
compulsory contributions - ? On this basis, it was assumed during the course
of further considerations of the various
insurance models that catastrophe insurance
should be introduced as compulsory insurance
79Catastrophe Insurance project in Germany
Actuarial models (8)
- Preliminary comments on the examination of the
insurance model - The fundamental features of the German insurance
market are - strong regionalisation of the market (history of
the origins of companies), and - extremely diverse exposure of insurers in respect
of catastrophe risks - In order to guarantee a functioning risk spread,
a specialist catastrophe insurer is required
which bundles all risks - Such a specialist catastrophe insurer can be
either an original insurer or a reinsurer
80- Catastrophe Insurance project in Germany
- Actuarial models (9)
Policyholder
Original insurer model
Subscription agent only (commission-based
brokerage, portfolio management and claims
processing)
Original insurers operating in Germany
Commitment to contract
Regulated price per zone and risk type
Specialist original insurer (AG)
Equity capital/Shareholder
Aggregate excess of loss capacity (capacity
across all risks of reinsurers resident in
Germany)
Reinsurance
Government guarantee
Insolvency of specialist original insurer in the
event of loss expenditure exceeding a limited
government guarantee
81Catastrophe Insurance project in Germany
Actuarial models (10)
- Evaluation of original insurer model
- The original insurer model has numerous
disadvantages - Portfolio losses with the inclusion of storm
insurance can create financial problems,
particularly for smaller insurers - Damage to market approach distribution of
products of a third-party company - Elimination of competition (cartel law!)
- Staff redundancies between original insurer and
specialist original insurer splitting of
underwriting and policy formulation functions not
permissible - High IT investment
- ? Because of these disadvantages, the initial
insurer model has been rejected
82Catastrophe Insurance project in Germany
Actuarial models (11)
Reinsurer model
Policyholder
Risk-ceding original insurers
Full cession to specialist reinsurers / avoidance
of negative selections
Retrocession 100 of primary
Cession in return for reinsurance commission
Regulated price per zone and risk type
Specialist reinsurer (AG)
Equity capital / Shareholder
Aggregate excess of loss capacity across all risks
Reinsurance
Limit of liability in relation to original
insurer and insured required in the event of an
insufficient government guarantee(Limited
liability may not apply if, including retention
and reinsurance, total liability coverage of
30 billion is available)
83Catastrophe Insurance project in Germany
Actuarial models (12)
- Evaluation of reinsurer model
- The reinsurer model has the following advantages
- Participation in course of business through
retrocession to original insurers - Customer relationship remains with the original
insurer - Portfolio management / support by original
insurer - Net risk bearer is a catastrophe reinsurer
- Less complicated than original insurer model in
terms of cartel law - Avoidance of staff and IT-related redundancies in
the areas of underwriting, administration and
claims processing
84Catastrophe Insurance project in Germany
Actuarial models (13)
- Evaluation of reinsurer model
- Despite the stated advantages, the reinsurer
model entails a deep fracturing of the German
insurance market as it requires both - the creation of a standard product, and
- a regulated flat premium
-
- However, the advantages outweigh the
disadvantages when compared with the original
insurer model
85Catastrophe Insurance project in Germany
Actuarial models (14)
- Result of comparison of original insurer and
reinsurer models - The reinsurer model is preferred subject to
current solvency requirements for original
insurers. - To avoid a second retention of original insurers
(risk of ruin!), this model requires a total
capacity of 30 billion p.a.
86Catastrophe Insurance project in Germany Backup
Other models
- Government- and tax-financed models have not been
considered in Germany, as policy guidelines
dictate that only actuarial models should be
tested. - The background to this decision is the general
disadvantages of government- and tax-financed
models - These models generally lack a facility for
regional risk spreading - In the case of a loss, a lack of specific purpose
for resources can mean that the resources
necessary for compensation for damages are not
available - The stated models involve intervening in the
existing free market
87Catastrophe Insurance project in Germany
Actuarial models (15)
- Intermediate result
- In Germany, an annual capacity of 30 billion is
required for the implementation of mandatory
catastrophe insurance or compulsory catastrophe
insurance - Implementation of a limit of liability (per
policy / per event) is not feasible for both
political and legal reasons. - The structure of the reinsurance must reflect the
above government guarantee. - However, in order not to be burdened with
handling frequent damages or small-scale damage
events, the government will only provide capacity
within the context of a reinsurer of the last
resort
88Agenda - Catastrophe insurance in major EU
countries
? Starting position
? Examination of the European models
? Catastrophe Insurance project in Germany
? The product
? Risk potential and rates
? Actuarial models
? Rates and reinsurance
? Financial accounting and solvency
? Assessment of the overall situation
? Annex Verification structure for
catastrophe insurance
89Catastrophe Insurance project in Germany Rates
and reinsurance (1)
Structure of reinsurance
Government guarantee
2nd layer
Reinsurance to German and international reinsurers
1st layer
Capacity of original insurers(with or without
retrocession)
Primary
90Catastrophe Insurance project in Germany Here
Premium flow, solvency requirements in the
reinsurance model (2)
Compulsorily insuredbuilding owners
Shareholders
Equity yield rate
Gross premiums
Gross premiums
All original insurers
Catastrophe reinsurer
Government guarantee
Refund of costs
Provision for risks
-
Administration costs
Solvency requirement
Solvency requirement
Solvency requirement
3rd layer
Retro premiums, incl. capital costs
Reinsurance premium
Reinsurer
2nd layer
Solvency requirement
1st layer
91Catastrophe Insurance project in Germany Backup
Rates and reinsurance (2a)
- Notes on the Premium Flow diagram
- The limits of the individual layers would have to
be negotiated specifically as required. - Solvency requirements are derived from existing
regulations or for catastrophe reinsurance
through analogy conclusions. Only the premiums
index is represented. - The equity yield rate for the transferred
business (original insurers as retrocessionaries)
is paid in settlement via the retro premium. - Effects of Solvency II are not taken into account
92Catastrophe Insurance project in Germany Rates
and reinsurance (3)
- Risk differentiation
- In accordance with the non-binding risk premium
rates published to date, or more precisely the
Associations studies, the following regional
differentiations have been investigated in an
initial project phase - Four ZÜRS zones
- Three earthquake zones
- Two storm zones
- Two storm tide zones
- Further differentiations were not the subject of
the discussion.
93Catastrophe Insurance project in Germany Rates
and reinsurance (4)
- Spread of ratesin connection with the relevant
zones is considerable - The following two approaches are possible
- Percentage distribution Here, costs are charged
as a percentage of net premiums. This means that
exposed zones have to bear much higher costs than
favourable zones. - Sum insured-dependent distribution Sum
insured-dependent distribution of costs is also
conceivable. This would enable the lowest
possible cost burden - even for exposed risks. - This point has not yet been finally decided.
94Catastrophe Insurance project in Germany Rates
and reinsurance (5)
- Note -Example of calculationusing fictitious
parameters
- Abstract example
- Percentage distribution
- Of a non-exposed risk
- Ins. 300,000 0.18o net premium 54
e.g. 50 surcharge for
costs 27 Gross premium 83 -
- Of an exposed risk
- Ins. 300,000 1o net premium 300
e.g. 50 surcharge for
costs 150 Gross premium 450
95Catastrophe Insurance project in Germany Rates
and reinsurance (6)
- Note - Example of calculationusing fictitious
parameters
- Abstract example
- Sum insured-dependent distribution
- Costs are calculated independently of claims
expenditure - Of a non-exposed risk
- Ins. 300,000 0.18o net premium 54
e.g. 0.2o surcharge
for costs 60 Gross premium 114 - Of an exposed risk
- Ins. 300,000 1o net premium 300
e.g. 0.2o surcharge