PERRELS-Natural hazard insurance coverage and national debt-ID1077-IDRC2014_b

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5th International Disaster and Risk Conference IDRC 2014 Integrative Risk Management - The role of science, technology & practice 24-28 August 2014 in Davos, Switzerland

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PERRELS-Natural hazard insurance coverage and national debt-ID1077-IDRC2014_b

  1. 1. Modelling crisis management for improved action and preparedness Insurance coverage of natural hazard damages and fiscal gap in EU IDRC Davos 2014 Adriaan Perrels1, Väinö Nurmi1, Marc Erlich2, Agnès Cabal2 1Finnish Meteorological Institute, Helsinki, Finland 2Artelia Eau et Environnement, France This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 284552 "CRISMA“
  2. 2. 08/26/14 | 2 Content of presentation  1. INTRODUCTION AND ECONOMIC JUSTIFICATION  2. COVERAGE OF NATURAL HAZARD DAMAGES BY INSURANCE AND STATE COMPENSATION SCHEMES  3. FISCAL GAP IN EU COUNTRIES  4. AN EXAMPLE - ROLE OF INSURANCE COVERAGE IN NATURAL HAZARD PREPAREDNESS IN FRANCE  5. CONCLUSIONS
  3. 3. 08/26/14 | 3 Introduction and Economic Background  In addition to direct damages, natural hazards cause indirect damages, usually expressed as foregone output, broad consensus that indirect effects are negative (at least on short-term)  Risk transfer has been lately acknowledged to be one of the most important factors explaining the consequent macroeconomic effects  The link between the levels of risk transfer and indirect effects can be explained by (at least) two mechanisms:  1) supplementing direct resources to the areas suffering the largest resource scarcity, and  2) spurring economic activity in the affected area via multiplier effects  The prime concern of this study is that an area can be underinsured, causing slow recovery and consequently high negative indirect effects in case of the occurrence of a major natural hazard  In the FP7 project CRISMA (http://www.crismaproject.eu/) economic indicators for natural hazard related to crisis management were proposed. This paper deals with two of them: insurance coverage and the so-called ‘fiscal gap’ indicators
  4. 4. 08/26/14 | 4 COVERAGE OF NATURAL HAZARD DAMAGES BY INSURANCE AND STATE COMPENSATION SCHEMES  The 28 Member States of the European Union show a large variation in the extent of insurance coverage of direct damages from natural hazards  The insurance coverage at country level was assessed for four different types of natural hazards (floods, earthquakes and volcanic eruptions, storms, forest fires)  The way of reporting insurance coverage varies greatly between countries and types of hazards (available data e.g. fraction of entities insured, historical data of insured losses on the share of total losses, insurance penetration rate etc.)  To facilitate straightforward interpretation for users, these different ratios were merged into one indicator, of which the statistical basis may vary, but which intends to convey the same message reflecting the level of the insurance coverage in each country  Consequently insurance coverage is reported as an interval instead of an exact ratio  This indicator shown in figure 1 and is color-coded with the following criteria: red – underinsured (poor), orange – underinsured (low), yellow – underinsured (medium), green – prudent insurance
  5. 5. 08/26/14 | 5 FISCAL GAP IN EU COUNTRIES  The public capital stock and ex-post aid for private sector need to be backed by a resilient public finance situation (if there is no reinsurance scheme adopted by the government)  To assess the financial resilience of the public sector, we created an indicator called “fiscal gap” which measures the borrowing capacity in relation to the direct costs of natural hazard  Up-to-date figures on government debt by country can be easily obtained from the European Central Bank and Eurostat. The results in figure 1 are based on the government debt levels ultimo September 2013 – need for annual updating  Historical data on natural hazards costs were gathered from EM-DAT database  We assessed the country level fiscal gaps with two indicators: 1. (130% of GDP – current government debt) / costliest event of past 20 years (approach 1 in figure 1) 2. (130% of GDP – current government debt) / (total hazard cost by decade* x 0.75) (approach 2 in figure 1) *) of a recent decade with the highest hazard cost (1983-1992/1992-2002/2003-2013)
  6. 6. 08/26/14 | 6 Results, Figure 1
  7. 7. 08/26/14 | 7 ROLE OF INSURANCE COVERAGE IN NATURAL HAZARD PREPAREDNESS IN FRANCE  As can be seen from figure 1, France has a prudent insurance coverage for real estate related risks  System of compensation is implemented through a compulsory additional contribution of every person signing an insurance multi-risk contract for a house or an apartment  The French system of compensations of damages due to natural catastrophes, guaranteed by the state and facilitated by insurance pooling, allows balancing of good and bad years in terms of damage from natural hazard as long as there is no significant rise in the insured losses  However, as the compulsory payments are not based on the risk level of the household and compensation is guaranteed for all, the system can be suspect to problems related to adverse selection and moral hazard  Anticipatory land use planning, risk disclosure and insurances that promote vulnerability reduction could reduce the rise in damage cost appreciably  The incentivizing features of CATNAT could be enhanced, which may help to maintain reasonably high compensation levels and moderate premium levels
  8. 8. 08/26/14 | 8 Conclusions  The capability to recover from major damage caused by natural hazards is an important (third) element of resilience, next to effective prevention and emergency services  Sufficient insurance coverage and state funding capability are essential ingredients for good recovery, however insurance coverage regarding floods and geophysical hazards is far from sufficient in quite some EU Member States  Some countries with weak insurance coverage currently also have a fiscal gap. This combined weakness undermines outlooks for good recovery after high impact natural hazards  The French experience with combined private insurance – state guarantee shows that this may be effective, while also better maintaining financial resilience. However, the system (including the insurance policy conditions) should improve emphasis on preventive and vulnerability reducing actions by public and private actors, in order to remain robust in the long run
  9. 9. 08/26/14 | 9 Thank You! Follow CRISMA in: www.crismaproject.eu
  10. 10. 08/26/14 | 9 Thank You! Follow CRISMA in: www.crismaproject.eu

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