The President of IVASS Louis Frederick Signorinispoke last Friday at the ANIA conference “Disaster risk financing: the role of insurance for new public
private partnerships”.
The topic of climate change is now a daily topic, as the increase in frequency and intensity of river and coastal floods, landslides, droughts and forest fires around the world becomes more evident every day.
The European Report on the State of the Climate 2023 – Signorini recalls – estimates that the direct damage to property generated in 2023 by floods, inundations and fires (without considering, that is, the indirect effects) amount to more than 13 billion euros and the human toll to 151 deaths. 151 deaths. In recent years, moreover, there has been growing international attention to natural disasters as a potential source of systemic risk to financial stability.
It is also now evident that a purely ex-post approach to damage repair and loss compensation is not sustainable. Both ex-ante risk mitigation and damage prevention and limitation are desirable.
The nature of catastrophe risk requires an appropriate interaction between public relief interventions and private insurance schemes.
Some useful principles for policy makers have recently been summarised in a “decalogue” for natural disasters drawn up by the OECD and the IAIS, the International Association of Insurance Supervisors, under the auspices of the Italian Presidency of the G7, which underlines that an effective protection mechanism against natural disasters requires the cooperation of many actors, both public and private.
: Building on what he had already said last year, Signorini summarized the pros and cons of two ways of sharing the costs of a catastrophic event: public intervention and private insurance. Public intervention will always be necessary to some extent, because not all risks are actually insurable and because, in the case of truly catastrophic events, some form of coordination of reconstruction and its financing is indispensable. Its disadvantages are, first, that when an event occurs, there is uncertainty about whether compensation will be available and to what extent, who will be entitled to it and under what conditions; second, experience tells us that the implementation of relief measures often comes very late after the event; third, that the distribution of the tax burden, being of course based on pure ex-post discretionary mutualization, can hardly be designed to create the right incentives for ex-ante risk prevention or risk mitigation.
Private insurance contracts exploit the opportunities of diversification among unrelated risks and may rely on risk transfer and pooling techniques, with benefits ultimately shared between the insurer and the insured. Benefits are ultimately shared between the insurer and the insured. If well designed and implemented, compensation is certain, rapid, and directly proportionate to the individual’s loss; it can provide powerful incentives for prevention. However, if there are no provisions for compulsory coverage, it is subject to adverse selection. Furthermore, it cannot achieve the redistributive goals that public intervention might instead pursue.
Italy, despite being particularly exposed to seismic and hydrogeological risks, shows the highest protection gap in Europe. From 1980 to 2022, approximately 97% of losses suffered due to earthquakes and floods were not insured, the highest level of underinsurance (so measured) for this type of risk in the European context.
The public’s reluctance to insure is explained on the one hand by a lack of awareness of the risk and/or the availability of insurance products; on the other hand by a difficulty in understanding complex policies (for example, regarding guarantees, benefits, exclusions), as well as a question of high prices.
The supply side is also facing major challenges. Risk modeling is difficult, especially because climate change could change the probability distribution of climate-related catastrophic events in a way that is difficult to predict. This makes insurance provision technically difficult and leads insurance companies to significantly increase prices. The same problem arises for reinsurance: as the effects of climate change become more evident, insurance companies are finding it increasingly difficult to reinsure themselves on the market.
These peculiar characteristics of catastrophe risk require careful measures to improve the Nat-Cat insurance framework and provide a form of public co-insurance, leaving the market to perform its allocation tasks as efficiently as possible.
IVASS welcomed the introduction of a system of Mandatory Nat-Cat insurance for businessestogether with a series of policy support tools, with the 2024 budget law. The law could bring Italy closer to other European countries (including France and Spain) and non-European countries (including the United States and Japan) that have already provided for mandatory or semi-mandatory models of insurance against natural disasters.
The technical details must be defined by a decree of the Minister of Economy and Finance and the Minister of Business and Made in Italy. It remains to be seen whether the insurance obligation will be postponed further or will actually come into force in 2025.
Signorini stresses that the scheme must be technically sustainable for insurers and affordable for policyholders, so that universal coverage can be achieved without problems. Reimbursements must be perceived as rapid and predictable. The extent of coverage offered (and requested) must be adequate. The implementing decree will specify a number of important details, including the events to be covered and the exclusion criteria.
In this regard, in the October issue that is about to go to press, SUBSCRIBE will comment on the draft decree in circulation, highlighting the critical points that demonstrate how far the legislator is from business.
Signorini concluded by saying that, in general, there are two other key ingredients to reduce Italy’s insurance protection gap: a increased risk awareness (and available risk protection tools) by the public; the continuous improvement of clarity and transparency by the industry.
“Citizens and businesses who are well informed about risks will likely be willing to seek greater protection and adopt mitigation measures that reduce the risk of loss and at the same time improve the conditions under which insurance can be provided. Insurers, for their part, should continuously strive to improve the structure and language of contracts, as well as all aspects of policy distribution. Ensuring that contracts are as clear, simple and readable as possible, and that potential customers are in the best position to understand the price, scope of coverage and other conditions, is important not only for the sake of fairness, but also to ensure the proper functioning of market competition. Insurance education and transparency: Ivass is committed to contributing to these two objectives, within its mandate, in the best possible way”.
Among the other speakers, the Director General of the Ministry of Economy and Finance Richard Barbieri Hermitte confirmed that compulsory insurance against catastrophic damages for businesses is the first step towards a system that can also cover families and infrastructures, with sustainable costs.
Carmine Of Boredomdirector of financial affairs at the OECD, cited the framework document developed by the G7 finances in Stresa, with the contribution of the OECD and the Iais, which analyses the aspects of supply and demand, on the one hand awareness and on the other the tools, the policies. This will serve for a coordinated approach, essential for the creation of public-private partnerships.
These partnerships can help mitigate risks in cases of natural disasters and at the same time reduce the negative consequences on the GDP of a country hit by a natural disaster, according to Fausto Parentedirector Eiopa.
Florence Lustmanpresident of France Assureurs, gave the example of the system in France, where a NatCat coverage system has been active for 42 years and covers companies, private individuals and local authorities. The guarantee – automatically included in all damage insurance contracts – is thus spread over 45 million contracts, guaranteeing a very high level of mutualization. The average cost is around 25 euros per person, although increases of up to around 40 euros are expected. For the coverage to be triggered, a decree must be issued that recognizes the catastrophe, there must be direct damage relating to a specific date.