Swiss Re EMEA CEO takes aim at $15.5bn nat cat protection gap

In Europe, natural catastrophes resulted in overall losses of $23 billion in 2016. Of these losses, $7.5 billion were insured, according to Swiss Re.

“Clearly the protection gap has increased, partly due to population growth and concentration of wealth but partly also because of climate change,” Jean-Jacques Henchoz, Swiss Re CEO Reinsurance EMEA, tells Intelligent Insurer.

“Whatever the drivers are, fact is that we have seen climate change as one of the triggers for frequency and severity of natural catastrophes,” he notes.

In order to reduce the $15.5bn protection gap in Europe the reinsurer is bringing together representatives from the insurance industry, stakeholders from the EU Commission, the EU Parliament and other public sector organisations, and the academia to discuss examples of successful natural catastrophe schemes globally and see what learnings could be transferred to Europe.

Some natural catastrophes such as earthquake and floods have not been traditionally part of the insurance coverage, particularly for individuals, Henchoz explains. The insurance gap is lower for windstorms and in commercial insurance lines.

“One of the hurdles for the insurance industry is to create scale and diversification of portfolios to make some of these perils insurable. There is also the investment needed to manage these risks, to prevent them, to mitigate their impact,” Henchoz explains.

In many natural catastrophe events in Europe, the government is in charge of footing the bill after a catastrophe, paying for the rebuilding and organising the reconstruction and support.

“Public authorities have a very important role when it comes to prevention measures like putting in place adequate building codes, risk zoning and mapping, flood defence and emergency preparedness,” Henchoz says.

“But by no means can governments serve as a substitute for proper insurance and offer the budget necessary for the rebuilding after an event,” he adds.

Budgetary constraints may prevent governments from offering the support and aid needed by the population as quickly as the private sector is capable of, according to Swiss Re.

Pointing to the 2009 earthquake in Italy’s province of L’Aquila, Henchoz notes that still today there are families living in temporary housing.

Public/private partnerships can offer more effective and efficient solutions to societies.

A case in point is the UK’s flood scheme Flood Re.

The programme is financed through a tax collected from every home insurer in the country. The tax contributes £180 million to a centrally managed fund each year. Insurers pass on the flood risk part of the individual’s policy to Flood Re. If the insured makes a valid claim on their home policy, Flood Re reimburses them from the central Flood Re fund.

The scheme allows for more competitive pricing on home insurance policies for individuals whose properties are at risk of flooding, benefitting over 350,000 households, according to the Flood Re website.

The programme provides flood cover in high-risk areas for domestic properties built before 2009 while seeking to avoid new construction in flood-prone zones.

Another example of an existing public private partnership to cover nat cat risk in Europe is the Norwegian Natural Perils Pool. The cover is compulsory and organised as a loss pool rather than a premium pool. All damages covered are distributed, after the reinsurance payments, among member companies based on their market share. All fire insurance companies registered in Norway participate in this pool.

Bundling natural perils with fire insurance policies creates a larger risk pool, makes disaster insurance more affordable for everyone and increases access to cover for customers, Swiss Re notes.

Such a scheme decreases the risk of anti- selection for one peril and offers the cedant a breakdown of the premium based on individual risk coverage. For example, losses from natural hazards in Switzerland (flood, storm, hail, avalanche, snow pressure, landslide, rock fall and rockslide) are covered in building and content policies that bundle fire and nat cat risks.

Swiss Re wants to persuade governments and EU officials to work with stakeholders to create similar protection schemes elsewhere in Europe.

When it comes to floods, Central Europe is significantly exposed, particularly Germany and  Switzerland, Henchoz notes. Earthquakes are more of an issue in southern Europe, particularly Italy, where frequency of events has increased in the last ten years, he adds.

Insurers can provide insights for policymakers into the value of preventive investments in certain types of natural catastrophes. Companies have also built global databases to capture information on data losses. Due to this expertise in natural catastrophe modelling and the ability to incentivise preparedness for a natural catastrophe, insurance can solve the moral hazard problem and reduce the need to rely on public funds in disaster situations, consequently reducing stresses of fiscal positions.

As a result, both governments and homeowners benefit from lower costs and reduced damage in a post natural catastrophe environment, according to Swiss Re.

“The knowledge in terms of how to address and manage these risks sits within insurance companies,” Henchoz says.

Nat cat protection schemes can be set up on a voluntary or compulsory basis.

“If you have a fully voluntary approach you need to either make sure that there is an attractive and affordable product,” Henchoz says. “You can also make the cover compulsory as one of the perils of a normal fire policy, but you need to be able to charge accordingly.”

The advantage of the compulsory option is that it provides the necessary scale for the private operators to manage this risk.

“The scheme doesn’t need to be compulsory but if it is voluntary it needs to be attractive,” Henchoz notes.