During the January renewals in CEE, reinsurance brokers operating in the region noted a previously unregistered trend: extreme frequency of medium-size catastrophe losses. While this in some case resulted in higher demand for cat protection, overall catastrophe capacity purchase in the region remained stable. Why the discrepancy?
According to Aon Benfield’s “Annual Global Climate and Catastrophe Report 2010”, last year, total nat cat-related economic losses in CEE exceeded USD12 billion. Floods remained the single most destrictuve type of natural disasters in the region: inundations in May-July alone generated an economic damage of around USD12.3 billion (for a list of CEE nat cats click here).
Calculating insured cat losses amassed in the region is apparently a rather challenging task, Aon Benfiled provide figures for few selected natural disasters. However, even incomplete data demonstrates a relatively low cat insurance penetration Economic damage related to May floods in CEE reached around US$5.8 million, half of the total loss figure for the region. At the same time, insured losses came to just US$690 million. In other words, insurance companies covered just a little more than 10% of the damage caused by natural forces. No wonder that despite a loss level of US$12 billion, the nat cat reinsurance capacity purchased in CEE, according to Guy Carpenter, reached only EUR1 billion.
To significantly increase the figure, the region would need to work harder on developing financial solutions for nat cat relief. However, CEE states are reluctant to come up with suggestions. Of all CEE countries, a cat pool has been established only in Romania. Poland, where nat cat-related losses were highest in the region, has been discussing a cat pool for three years, with no decision taken as of late January. Attempts of other regional markets to create similar financial mechanisms have been even less significant.
The international reinsurance industry provides limited, tuned to demand, traditional protection to CEE markets but seems rather reluctant to offer alternative solutions: despite the ongoing cat bond boom, no risk transfer instruments so far have been developed to specifically cover natural disasters in CEE.
“The demand to transfer risk to the capital markets via insurance-linked securities (ILS, or cat bonds) is mainly driven by the size of a loss potential”, Luzi Hitz, CEO and Eduard Held, head of sales&products at PERILS AG, explained to The Insurer.
“The top-five insurance loss potentials are US hurricanes, California earthquake, European windstorm, and Japanese earthquakes and typhoons. This is why the vast majority of cat bonds provide protection against these perils. The CEE insured cat risk, although significant (e.g. floods or earthauakes), is still considerably lower than these five loss potentials.”
“Therefore, to date, there has not been a cat bond issued covering CEE natural catastrophe risk. There are, however, industry loss warranty reinsurance contracts (ILW) in place, which include, among other territories, coverage for CEE cat risk. These covers are triggered by the insurance industry loss, are private placements and are mainly used by reinsurers to transfer risk to specialized retrocession companies.”
Therefore, CEE region remains dependant on two non-commercial sources of nat cat protection: national and sub-national. In late January, the European Commission approved a multimillion aid package “to help Poland, Slovakia, Hungary, Romania and the Czech Republic rebuild parts of their countries ravaged by floods”. Poland will receive EUR105 million, Hungary – EUR22 million, Slovakia – EUR20 million, the Czech Republic and Romania - EUR5 million each. Croatia, thanks to its EU candidate status, is in for around EUR4 million.
In the future, however, EU funds are unlikely to be an unlimited sourse of aid. The Commission seems firmly intended to reduce or at least keep a tight control over the nat cat relief budget. In late autumn, EurActiv cited Kristalina Georgieva, commissioner for international cooperation, humanitarian aid and crisis response, as saying that “in recent years, the EU has spent more than it had set aside for its disaster response budget”. Later, through her spokesperson Ferran Tarradellas, Georgieva added that "since the 1970s, the number of disasters has increased around five-fold and our budget is indeed under pressure. If this trend continues, it will be under more pressure. But this is a call to be more cost effective in terms of the economic crisis".
In the future, it seems, countries of the region will have to increasingly more rely on their national disaster funds – that is, when the funds are there. Czech citizens that suffered from massive inundation in May 2010, for example, were quite surprised to find out that around a third of the country’s disaster relief fund amouting to CZK3 billion (EUR0.12 billion) had been spent on... financing general elections. "When we presented the budget, it was assumed an election would be in October 2009," spokesman for the ministry of finance Jakub Haas had to explain. "There is therefore no option but to release funds from the reserve due to the postponment of the election." So far, this has been a unique case, but with CEE governments trying to stretch their shrinking budgets, who knows what may happen this year.
There are of course, all kinds of special measures to refill disaster funds, for example, introduction of a flood tax, as it happened in Australia this year (see below). Yet the Australian know-how is rather out of the question in CEE: regional taxpayers are already burdened with increased VATs, extraordinary financial levies etc.
With state and sub-state measures of financial relief almost exhausted, international commercial involvement insignificant, and local solutions limited, the region seems to have no proper disaster protection at all but is not worried about it. Apparently, it would take a particularly devastating nat cat to bring a fresh wind to CEE cat coverage initiatives.
TAX NEWS FROM DOWN UNDER
In late January, the Australian government proposed a one-off income tax to provide aid to victims of the recent flood and rebuild the damaged infrastructure. The tax, to apply for a year starting from July 2011, is expected to generate around A$1.8 billion. Total costs of the flood, which swamped Eastern Australia in late December–early January, are estimated at A$5.6 billion. The government plans to cut or delay some other spendings to provide the rest of the funds.
Under the draft, the flood tax would be set at 0.5% of annual income above A$50,000 (US$49,900) and 1% on income over A$100,000 (US$99,800). The lowest earners and flood-stricken households are to be exempt from the levy.
The opposition has critisised the move claiming it would create “another government spending programme for which no-one is going to be held accountable if things go wrong”, as quoted by BBC. The opposition believes the reconstruction and aid to victims should be funded by budget cuts only. Despite massive flood costs, the Australian government still hopes to return to budget proficit by 2012-2013.
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