Main conclusions: The International Catastrophic Risks Forum - ICAR 2017

18 October 2017 — Adina TUDOR, Andreea RADU
Re/insurance specialists from the European region gathered, on 18 October, at the 14th edition of the International Catastrophic Risks Forum - ICAR 2017, to analyze the broad theme of climate change and catastrophic risks management.

The event, which took place in Bucharest, Romania, brought into debate the impact of natural disasters, which cause huge amounts of economic damage each year, most of which is uninsured, as well as the massive discrepancy between different regions across the world regarding the degree of economic losses caused by catastrophes and how much is covered by insurance.

David FLANDRO, Global Head of Analytics, JLT Re
  • 2017: the first time since 2011 when we had reinsurance losses of this size. This will have an impact upon reinsurance prices;
  • The average rate movements before January 1st, 2017 were falling. The softening of the market was very favorable for companies. In 2017, we had these massive catastrophes: hurricanes Harvey, Irma and Maria. Hurricane Irma will have a very large proportion reinsured, we believe that Hurricane Maria will also have an important proportion reinsured.
  • The protection gap is still visible: we saw low penetration rate of insurance in the regions affected by hurricanes. For example, 72% of the economic losses generated by Harvey were not insured - and we are talking about the United States, which is a mature insurance market. However, even here we see very low penetration, especially when it comes to certain risks: for example, we do not have proper flood insurance penetration in US. In many regions of the world, including in Romania, there is insufficient insurance.
  • After September 11 and Katrina, the reinsurance rates sky rocketed - we had a hard market. Before that, the rates were declining. Will the reinsurance market harden now, after the 2017 catastrophes?
  • What we have now in the reinsurance globally is a lot of capital. We believe that the reinsurance sector was, at least before the 2017 catastrophes, overcapitalized. 
  • This year, for the first time in a few years, we are starting to hear different conversations: people in the reinsurance industry are asking for an increase in prices.
  • Capital is still coming in the reinsurance sector, despite the hurricanes' impact.
  • Some market participants have estimated that third-party capital could make up approximately 40% of global property-catastrophe limit by 2020. We, at JLT, believe that this estimate is too aggressive, we believe that it will reach 25% - 30% in the 2020s. We believe that the third party capital is here to stay but it will not take over the market.
  • We have to remember that reinsurance property catastrophe rates online globally are really quite low right now compared with the average.
  • What's going to happen globally on January 1st? There are different competing factors which are going to impact the renewals.
Christian KREUTZER, Head Market Underwriting CEE, Swiss Re Europe
  • Why many insurable risks are not insured? What prevents customers from buying insurance? Factors include: affordability (for many - particularly lower income - customers, traditional insurance might be too expensive), insurability (it may be difficult to obtain traditional insurance cover due to a) location of risk (e.g. beach front), b) quality of risk (e.g. poor structure type), c) type of risk (e.g. CBI, market risk)), policy restriction (exclusion of certain types of infrastructure - e.g. Golf courses -, exclusion of incidental losses - e.g. debris removal, alternative accommodation, contents etc.), buying behavior (customers might be insured for some perils but not others, the lack of understanding, unawareness of risk), undervaluation (property might be undervalued and hence, not all losses are covered by the original policy), trust in insurers (people may perceive the government will help them out - and not insurance);
  • Parametric insurance can add value - it can be more affordable, we can increase the trust in the insurance industry, because the claim will be paid quicker etc;
  • In parametric insurance, the payout is determined based on a physical measure rather than an indemnity loss;
  • In the case of a parametric insurance, firstly, you need a NatCat event: the cover is triggered by the occurrence of a NatCat event and depends on its severity (e.g. magnitude of an EQ or peak gust wind of a hurricane). Secondly, yoou need a Reporting Agency, a neutral independent third party (e.g. USGS for EQ) which determines the severity of the event. Thirdly, you need a Calculation Agent: depending on the need of the insured/insurer a neutral calculation agent will determine the monetary payout. Lastly, you will have the insured - insurer relationship, and the pay-out to the insured is a function of the severity of the covered NatCat event;
  • Parametric products have fast payment speed: for example, in Japan, where we have a lot of parametric insurance covering earthquake, we observed that within 2 weeks after the event, most of the claims will have been already paid. 
  • Parametric insurance is fast (and this is one of its key advantages), flexible and affordable;
  • The parametric product is a new feature in many markets of the world;
  • In numerous parts of the world, when it comes to parametric insurance, we find interest in conceptual idea but lack of interest in investing in product development: "Give me a finished product I can sell" type of attitude. We need local market experience, parametric insurance cannot be "copy pasted" from one country to the other; 
  • Regulatory approval is seen as a big hurdle for parametric insurance: the question that arises is "is this still insurance or a type of derivative product"?
  • Getting money to poorer client segments can be an operative hurdle in case of parametric insurance (example: in regions like Africa, how can we make sure the farmers receive their payment);
  • Parametric insurance can provide ad-hoc cash to people in the immediate stage after a catastrophic event;
  • We need to understand the specific client needs, why insurance solutions are not bought and, regarding parametric insurance, we need to understand what are the best distribution methods for such products.
  • The main peril here in Romania is earthquake: and earthquake is the most suitable risk for the parametric insurance. The main issue is how we can, with a parametric insurance, reach a diverse number of risks affecting the entire country.
Francisco S. ESPEJO GIL, Senior Expert, Subdirectorate for Studies and International Relations, Consorcio de Compensacion de Seguros - CCS
  • In Spain extraordinary risks (both natural and anthropogenic) are covered through a scheme which main features are both legal (compulsory coverage applied to most property, life  and personal accident policies; variety of risks covered, implying compensation) and institutional (model of private-public partnership; the scheme managed by the Consorcio de Compensacion de Seguros - Insurance Compensation Consortium -, public tool at the service of the whole Spanish insurance sector, and fully integrated in it);
  • CCS is not a Pool, is a single enterprise which is pooling several risks. Basically, gthe Consorcio de Compensacion de Seguros (CCS) is a public business institution attached to the Ministry of Economy, Industry and Competitiveness;
  • CCS performs several roles in support of the Spanish Insurance Sector, namely: 1) Insurance of Extraordinary Risks, 2) Winding-up activity in the event of bankruptcy of an Insurance Company, 3) Complementary role in auto, environmental, nuclear, agricultural and other insurance lines;
  • The "extraordinary risks" include: natural risks (flood - riverine or flash-flood, coastal flood - plus wave battering, strong winds, earthquakes and tsunami, volcanic eruptions, fall of meteorites and sidereal bodies), as well as man-made risks (terrorism, riot, mutiny, revolt, Acts of Armed Forces and Law Enforcement Agencies in peacetime);
  • CCS does not cover landslides, damages produced by rain and snow;
  • Everything that CCS is defined by law, which provides legal security for customers; 
  • CCS compensates the losses to the policyholders regardless of the amount of total losses, the number of insured affected or the size of the affected area;
  • Through incorporating new insurance lines to the Extraordinary Risk Scheme and the rise of insurance penetration in Spain, the cover expands currently to 120 million policies, with nearly 16 trillion Euro of insured capital. Surcharges income allow for the     build-up of an equalization reserve to face large scale catastrophes in the country (currently of ca. EUR 8 billion);
  • Dividing the total losses (in property) by the number of claims, at constant prices, the mean cost per claim has reduced by 2/3 in the last 30 years;
  • CCS is an active partner in risk reduction and risk awareness initiatives at Spanish, European and international levels;
  • Spain is a climate mosaic with dramatic variations in rainfall: most of the country has sub-humid or semi-arid conditions. Thus, irrigation infrastructures AND agricultural insurance are of high importance.
  • The current Spanish Multi-peril Agricultural Insurance is in place since 1980. The system is voluntary, but if the farmer decides to take insurance, must underwrite insurance for all exploitations of the same kind. The cover is provided by a pool, which composition varies annually and is approved by the regulator (23 companies in 2017). The management and administration is endorsed to AGROSEGURO. State support is provided through ENESA (National Body for Agricultural Insurance), and also subsidized by regional governments, eventually. During its lifetime, the AI has achieved sustainability, solvency and provides cover against most agricultural productions and climatological risks;
  • Risks covered by AI include damages caused by abnormal variations of weather and climate (hail, fire, drought, frost, flood, windstorm, hot wind, snowfall, excess humidity and other climatic adversities), as well as accidents, pests and diseases on agricultural productions and occasionally on installations. These risks are covered in a combined way (multi-peril policies). What is insurable under the AI cannot be compensated otherwise.
Adelina CARACOSTEA, Chief Commissary, Ministry of Internal Affairs
  • In Romania, we began to report storms very similar to tornadoes, suddenly appearing, quickly disappearing and leaving behind huge damages, including killing people standing in their way
  • These have determined Romanian authorities to take action
  • We already launched the DSU application - the official application of Romania's Department for Emergency Situations within the MAI. It is also connected with weather alerts from INMH
  • The purpose of this DSU application is to provide citizens with quick information and a reporting tool for disasters and critical situations which they might witness
  • Also, the Ro-Alert system is about to be implemented, in order to prevent the loss of human lives as a result of dangerous meteorological and hydrological phenomena
  • The Ro-Alert system will allow us to send warning messages, different from the regular SMS, that will immediately appear on the phones of those who are in a certain area
  • The system will soon be operational. Regarding those who do not have mobile phones, local authorities will take the responsibility of informing the population
  • A preventive behavior will save our lives and goods
Cornel COCA CONSTANTINESCU, Vice-president, ASF - The Financial Supervisory Authority
  • At the ASF initiative, a working group has been set up, in order to make a diagnostic analysis and find solutions to increase the household insurance penetration rate. We're expecting the result of this debate, to see if legislative changes are needed
  • We will decide together what to do with Romania's mandatory housing insurance law, but we need to decide quickly
  • I hope that, in the future, we will have a different approach than those from the past
  • An insurance that is mandatory must also be necessary. But, although PAD is mandatory, it is considered unnecessary by many. We have problems in how this insurance is perceived, because it is often perceived as a fee
  • We have identified two key reasons for which PAID is in the current condition and we can see those reasons' effects in the low coverage - 18.6% in September 2017
  • The main reason is that insurers must have the ability to sell, to be proactive and to really want to sell this policy
  • It is absurd to increase the insurance premium in the context of a low coverage
  • This law's objective has not been met and this form of insurance has not reached its purpose, which is worrying
  • Romania is in the Top 10 countries with the largest area exposed to earthquakes (42%)
  • Fining citizens for not buying this insurance products is not the solution
  • I hope that insurers and brokers will determine more involvement and professionalism in selling this (mandatory household) insurance
  • PAID is not the only one at fault for the condition of the mandatory housing insurance system. The entire market is at fault. Insurers promote and sell these policies
  • Today, PAID has a solid financial state and a very good reinsurance program
  • This national program needs to be supported by both all players and new shareholders
  • Prevention is extremely important. This way, we can solve most of our problems. We don't need to fine people, but to convince them that this insurance is in their benefit
Nicoleta RADU, General Director, PAID Romania
  • We must admit that, at the moment, we have a law that is not very operational. However, we need this law. I believe that (in order to increase the penetration of the mandatory household insurance) we need to define what the purpose of this law is, who are the responsible parties and what are the responsibilities of each and every one - and when it comes to PAID's responsibilities, we need the leverage through which the goals can be met
  • As far as the implementation of the law so far is concerned, PAID did not have all the leverage it needed, but it has done everything it could. In all these years, it has tried to strengthen its financial capability, starting from a point where it wasn't given many chances and advancing to a stable company. And we want to maintain this stability
  • We have constantly tried to communicate both to the population and the authorities the things we thought were not so well known. We have initiated and we will continue to pursue communication campaigns dedicated to those things
  • At this moment, we can expand the way PAID sells the PAD policies. Thus, we aim to increase the number of alternative solutions for selling the policies we manage, including, for example, selling them through brokers. We're not ready, at this moment, but we hope we'll be in the near future
Mihai TECAU, President of the Directorate, OMNIASIG VIG
  • The two forms of housing insurance (mandatory and voluntary) must be treated differently. The person who owns a house must have both types of policies, because this is the way the Romanian household insurance system was built
  • I believe that, somewhere, something is wrong: either on the communication side or as far as the risk management of those who have to buy those policies is concerned, because the homeowner either decides to buy only the mandatory insurance or decides to buy neither
  • I believe that the only prospect of (penetration) growth is to think how to sell both forms of insurance in the future
  • Catastrophic risks are risks that occur seasonally. For the optional insurance, a separate discussion is needed, because there are other types of risks
  • It is clear that the mandatory insurance, related to the catastrophic risks, is becoming more and more visible, at the moment. Household risks, such as pipeline water damage or fire, are risks that need to be promoted separately, their effects being mostly visible only for the affected house. I believe that these two things need to be discussed separately
  • The low penetration of the mandatory housing insurance, at the moment, means vulnerability in case of a catastrophic event
Viorel VASILE, President PRBAR, CEO SAFETY Broker
  • We are a newly established association (PRBAR) and one of our goals is to increase the insurance coverage by selling the mandatory housing insurance policies (PAD) through brokers
  • We've had many meetings and discussions, in the market, regarding the mandatory housing insurance
  • We need to increase the insurance coverage
  • One solution to the problems is to open up this company (PAID - The Natural Disaster Insurance Pool) and allow other companies to become shareholders. As a broker, maybe I'm also interested in being a PAID shareholder
  • In 7 years, we've ruined the optional housing insurance. We need to change something
  • If brokers sell about 80% of the MTPL policies, I think we can go further down the road and wish to sell PAD policies as well. By selling PAD policies, we can set a goal of 30% sales target
  • Currently, the average commission on PAD selling is 5% - 1 Euro
Aurel BADEA, Asset and Property Responsible, UNSAR - The National Association of Insurance and Reinsurance Companies in Romania
  • There are two issues that concern the insurance industry - increasing penetration (of the PAD policy) and the capability to manage a major natural disaster
  • The current penetration rate is similar to a (semi)failure of the insurance industry, because it is so low that a disaster would leave most of the population uncovered
  • A major earthquake would cause about 6 billion Euro worth of damages, of which only 1 billion Euro would be insured
  • Focusing on the penetration rate, one solution is related to the distribution mode. There has always been support for finding solutions to increase the distribution capability, but the visions have been different. Now, they're beginning to line up and the solution to give intermediaries access to sell directly for PAID is backed up by the majority of the industry members
  • Another issue refers to the product. We have the mandatory housing insurance - regulated with the three catastrophic risks and the other risks covered by the optional housing policies
  • Talking about storms, the optional insurance industry is operational, it's working. In the western area, there were about 6-7.000 claim files and, probably, the damages are worth about 15-20 million RON - it's only an appraisal
  • In other countries, the basic policy is sold together with other 1-2 catastrophic / atmospheric risks (storm, hail). It's questionable what we can do on our market. There's this suggestion. At this time, the optional household insurance policy is working and it covers damages caused by storms etc.
  • I don't think it's necessary to include additional atmospheric risks in the PAD policy
Bogdan ANDRIESCU, President, UNSICAR - The National Association of Insurance Brokerage and Consultancy Societies from Romania
  • When the mandatory household insurance policy (PAD) was launched, people understood [incorrectly] that this policy is sufficient and buying this policy translates to the idea that everybody's covered. This lead to a decrease of both the coverage and the medium price for the optional household insurance
  • I think that the mandatory household insurance has cannibalized the optional insurance and, thus, a confusion has been created
  • The insurance coverage is continuously decreasing, it's time we did something
  • Selling through brokers - this should've been done a long time ago. On the other hand, PAID can't be prepared, at this time, for this type of sales, because this solution is not specified in the law
  • From a 20% coverage to where we want to get is a long way
  • At the ASF meeting, we proposed the following: PAID to become a reinsurer, with, instead of 1,5 million policies, a few dozen of reinsurance contracts for them, and the PAD policy to be sold only by insurers and distributed through brokers
  • In some countries, insurance premiums are deductible and we can take this into account
  • Changing the law, by expanding risks, will only affect the sale of the voluntary household insurance policies. Extending the risks, we're just replacing the optional insurance with the mandatory one
Dr. Ing. Constantin IONESCU, General Manager, INFP - The National Institute for Earth Physics, Romania
  • The main research directions of INCDFP include: seismicity, earthquake monitoring and database management, seismic source physics, Earth's structure and dynamics, seismic risk and hazard, engineering seismology, earthquake prediction
  • We are a country with high seismicity. The entire Romanian territory is affected in the event of an earthquake with a magnitude higher than 7, happening in Vrancea
  • To decrease the seismic risk, we are exchanging data with institutions around the world, focusing on areas around Romania, concluding cooperation agreements with all countries around Romania, so that we can provide an analysis for all sources that may be affect Romania's territory. Earthquakes occur in Banat, from Serbia and felt in Banat, earthquakes in northern Bulgaria that may affect southern Romania, but also the earthquakes in the Black Sea - it should be taken into account the fact that there is a potential risk of a tsunami in the Black Sea -, is currently rare, but it can occur at any given time
  • When discussing the main earthquakes in Romania which affected Bucharest, the 1977 earthquake is the most often mentioned, but this was not the only earthquake, nor the biggest one reported in Romania. The biggest earthquake occurred in 1802, generating liquefaction effects in the area along the Dambovita river (oil surfacing out)
  • The Vrancea seismic zone in Romania - at the intersection of three tectonic plates -, is the most important area that produces earthquakes in the country. Every century, 3-4 earthquakes with a magnitude of 7 and, sometimes, more than 7 occur. At a recurrence period of 100 years, the Mercalli intensity for the Vrancea area is 8-9 degrees and the acceleration values, between 250-280 degrees
  • The measures taken to improve and decrease the seismic risk in Romania include: development and commissioning of early warning systems, improvement and implementation of building codes, development of mitigation laws and reanalyzing the characterization of active fissures and of the Vrancea seismic area, as well as research projects for knowing the seismic areas in Romania
Daniela GHETU, Editorial Director, XPRIMM Publications
  • We can see extremely unlikely risks for our country 10-15 years ago are happening now. This is a new challenge
  • It's very clear that meteorological phenomena with a catastrophic nature can be felt more often and at a much higher intensity than in the past
  • For Romania, the earthquake remains a risk that must be taken into account with great care. Also, major floods have become almost a habit every year. Thus, the consequences of such events are dramatic and produce large economic losses
  • Global economic losses caused by catastrophes totaled US $53 billion in S1 2017, according to AON Benfield appraisals, most of which being caused by extreme meteorological events. of the total, insurers have paid $22 billion in claim files
  • Munich Re estimates slightly lower damages, with total losses of US $ 41 billion, with an insured value of $ 19,5 billion
  • The insured losses represent, at best, no more than half of the total economic damages, at most
  • This year, at least, the damages caused by weather phenomena are important, but do not pose as a thread for the financial equilibrium of insurers. However, some reinsurers have announced diminishing profits
  • There is a need for an impulse to property insurance, both in Romania and in other countries
Catalin CHIOVEANU, Chief Property & Engineering Underwriter, CERTASIG
  • CERTASIG is in the process of renewing the reinsurance contract and we're trying, as before, to get enough capital to meet our clients' needs, especially corporate ones
  • I can't show you figures because we're in a full process of reinsurance renewals. What I can tell you instead is that, compared to 2016, we have a higher reinsurance rate
  • We are also PAID members and, therefore, we desire for a higher penetration rate from the point of view of the mandatory housing insurance provided by PAID

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