”Insurance for natural disaster in Italy”

Dott. Ing. Sergio Ginocchietti Property Claims Manager – UnipolSai Assicurazioni SpA

Oxford, 5/6 aprile 2016

Agenda

• Seismic and hydrogeological risk in Italy• The legislative framework proposed by Italian insurers• The experience of the 2012 earthquake in Emilia- Romagna and the floods in 2014• The possible future developments

The cost sustained by the State in the last 20 years for natural disasters has recently been estimated to be around 3,500 million euros per year

While Insurance coverage for floods is relatively widespread in Italy above all in the industrial sector, it is very rare for earthquakes

In the private sector insurance coverage for natural hazards is almost absent

There is no subsidized insurance coverage by the State , unlike in almost all main EU countries, where the model of private-public partnership for the management of disaster risks prevails

How many and what are the risks of natural disasters in Italy?

How the number of affected areas has evolved since 1909 (source DPC-SSN) Increasing seismic hazard represented by color intensity

The classification of earthquake affected territories in Italy

Seismic hazard (present classification)

Zone 1° categ. The most dangerous where the most powerful earthquakes may occur Comprises 725 municipalities

Zone 2° categ In these municipalities powerful earthquakes may occur. Comprises 2.344 municipalities

Zone 3° categ. Municipalities in this zone are exposed to earthquakes of moderate strength . Comprises 1.544 municipalities

Zone 4° categ. The least dangerous: In these territories the likelihood of seismic events is low. Comprises 3.488 municipalities

3.069 municipalities out of 8.101 are located in high seismichazard zones

5.581 municipalities out of 8.101 are located in areas subject to high hydrogeological hazard

Hydrogeological risk (floods/landslides)

Any civilised nation, which is, as in the case of Italy, certain to have to deal with such problems at any time, has to be aware of the risk run by citizens and should prepare all those means necessary to prepare for, protect and deal with eventual emergencies (risk management based policies).

The role of the State can no longer be the one that we have known for the last few decades. Given the current scarcity of financial resources, modern and effective assistance requires a very close and strong public-private partnership, balancing collective solidarity and invididual responsibility.

Private companies working in fields that are closely connected to social needs and interest, like insurance, can play a decisive role, also in determining a change in mentality that the general public, which has been used to expecting state intervention and assistance, needs to make.

Seismic events in Europe in the last century

Italy is by far the European nation most affected by earthquakes!

What is currently being done in Italy to deal with the problem?

Several atempts have been made over the last few years to introduce a law to regulate the situation. However, all have been unsuccessful because of the lack of agreement among political parties and fierce opposition on the part of insurers, due to the significant financial unsustainability of the proposals put forward (especially as regards the missing identification of a cap beyond which the State would be called upon to intervene)

The key issues to be dealt with

TWO POSSIBLE INSURANCE MODELS

Compulsory insurance Semi-compulsory insurance

Compulsory coverageFor damage due to fire and natural disasters for all households and commercial activities located in residential buildings

Compulsory extension of free coverageExtension of coverage to include damage resulting from natural disaters for households and commerical activities located in residential buildings that are already insured against fire (“French” model)

In both cases the entity and location of insured goods must be assessed and the adverse selection of insurance only by those who are exposed to high risk should be avoided (only those who are exposed to the highest risk buy insurance).

Residential sector: number of dwellings and potential insured amounts (estimated cost of total reconstruction - source CRESME)

Regione Provincia N. Abitazioni S.A. StimataAbruzzo Chieti 188,747 26,675,649,359

L'Aquila 204,340 25,162,034,939Pescara 128,223 16,552,567,345Teramo 143,966 19,566,912,196

Abruzzo Total 665,276 87,957,163,838Basilicata Matera 94,242 9,923,094,634

Potenza 190,367 21,932,567,213Basilicata Total 284,609 31,855,661,847Calabria Catanzaro 200,511 22,972,794,463

Cosenza 432,006 47,259,822,390Crotone 102,684 12,210,291,855Reggio Calabria 302,403 37,360,667,717Vibo Valentia 96,584 11,291,729,416

Calabria Total 1,134,188 131,095,305,841Campania Avellino 200,644 25,115,467,070

Benevento 128,178 16,383,500,194Caserta 350,622 40,763,595,702Napoli 1,032,303 98,008,080,442Salerno 446,738 51,976,582,956

Campania Total 2,158,485 232,247,226,364Emilia Romagna Bologna 441,455 54,704,579,513

Ferrara 180,543 24,995,629,278Forlì-Cesena 163,026 23,615,336,656Modena 294,909 41,816,084,094Parma 206,910 29,306,251,979Piacenza 148,598 19,506,681,625Ravenna 178,908 26,606,076,531Reggio Emilia 204,995 31,058,955,410Rimini 132,029 16,960,504,429

Emilia Romagna Total 1,951,373 268,570,099,514Friuli Venezia Giulia Gorizia 66,499 9,326,885,434

Pordenone 133,337 24,769,638,036Trieste 121,187 13,738,774,736Udine 271,425 46,320,762,226

Friuli Venezia Giulia Total 592,448 94,156,060,432Lazio Frosinone 225,213 34,278,574,626

Latina 245,714 28,335,286,076Rieti 101,650 12,263,090,978Roma 1,683,522 180,164,361,686Viterbo 153,257 17,977,021,171

Lazio Total 2,409,356 273,018,334,537Liguria Genova 462,290 46,172,517,129

Imperia 155,539 14,978,781,941La Spezia 118,887 14,780,039,519Savona 208,091 20,240,677,216

Liguria Total 944,807 96,172,015,806Grand Total 10,140,542 1,215,071,868,181

Regione Provincia N. Abitazioni S.A. StimataLombardia Bergamo 464,485 63,423,758,898

Brescia 527,737 74,771,604,975Como 258,645 33,501,401,535Cremona 143,222 22,102,520,015Lecco 152,651 19,038,182,132Lodi 84,020 11,087,222,344Mantova 158,329 29,025,584,088Milano 1,596,799 184,343,177,239Pavia 249,078 33,211,380,646Sondrio 126,523 14,340,252,634Varese 362,086 49,669,119,392

Lombardia Total 4,123,575 534,514,203,897Marche Ancona 200,602 24,995,779,537

Ascoli Piceno 165,962 22,424,444,735Macerata 141,801 19,735,778,113Pesaro e Urbino 164,804 21,238,030,530

Marche Total 673,169 88,394,032,916Molise Campobasso 123,829 15,259,288,890

Isernia 51,383 7,269,081,509Molise Total 175,212 22,528,370,399Piemonte Alessandria 238,567 31,291,936,083

Asti 114,166 15,044,276,956Biella 100,094 13,813,538,017Cuneo 335,253 40,615,993,632Novara 165,732 22,080,640,802Torino 1,050,783 112,830,870,706Verbano-Cusio-Ossola 107,924 12,241,256,248Vercelli 98,327 11,855,763,723

Piemonte Total 2,210,846 259,774,276,166Puglia Bari 614,953 69,024,904,864

Brindisi 214,456 27,886,209,766Foggia 311,034 34,854,674,693Lecce 404,414 60,285,362,414Taranto 274,755 34,758,375,834

Puglia Total 1,819,612 226,809,527,571Sardegna Cagliari 214,847 30,372,337,399

Carbonia-Iglesias 77,502 10,847,024,746Medio Campidano 49,881 8,308,546,031Nuoro 85,509 12,548,798,865Ogliastra 33,786 4,764,510,379Olbia-Tempio 91,222 11,306,781,847Oristano 79,665 13,318,889,810Sassari 157,483 22,331,815,756

Sardegna Total 789,895 113,798,704,833Grand Total 9,792,309 1,245,819,115,782

Regione Provincia N. Abitazioni S.A. StimataSicilia Agrigento 272,005 30,995,073,496

Caltanissetta 154,991 16,943,450,495Catania 489,243 51,748,438,876Enna 99,392 10,666,264,518Messina 376,559 38,379,395,898Palermo 589,209 63,338,558,799Ragusa 175,643 21,246,896,353Siracusa 204,185 23,829,297,777Trapani 243,487 33,196,751,683

Sicilia Total 2,604,714 290,344,127,895Toscana Arezzo 144,324 19,204,860,585

Firenze 402,825 52,239,947,400Grosseto 133,589 14,126,472,794Livorno 165,922 15,968,937,010Lucca 189,753 26,743,899,931Massa-Carrara 107,930 12,488,202,826Pisa 167,417 23,079,111,885Pistoia 127,875 18,715,327,550Prato 87,263 12,164,072,416Siena 121,385 15,706,934,755

Toscana Total 1,648,283 210,437,767,152Trentino Alto Adige Bolzano 198,928 26,896,002,501

Trento 294,258 37,873,382,344Trentino Alto Adige Total 493,186 64,769,384,845Umbria Perugia 267,916 41,565,547,175

Terni 104,210 12,732,262,164Umbria Total 372,126 54,297,809,339Valle d'Aosta Aosta 101,095 9,593,295,502Valle d'Aosta Total 101,095 9,593,295,502Veneto Belluno 134,439 19,184,655,317

Padova 343,794 61,067,695,376Rovigo 107,115 18,075,938,423Treviso 327,105 59,761,446,619Venezia 385,186 53,354,687,642Verona 368,512 55,800,486,139Vicenza 350,586 60,077,363,261

Veneto Total 2,016,737 327,322,272,777Grand Total 7,236,141 956,764,657,511

Total ITALY: 27.168.992 dwellingsTotal ITALY – Total reconstruction costs (estimated according the unitary value CRESME)

3.417.655.641.474 €

APPORTIONING OF PREMIUM ACCORDING TO THE LEVEL OF RISK OR TO THE PRINCIPLE OF MUTUALITY/SOLIDARITY

Pemium proportional only to degree of risk

Compromise to maintain prices within a certain range (i.e. fixing a ratio between maximum and minimum prices)

Average premium price based on the solidarity principle

- Incentivates local initiatives aimed at reducing risks

- Implies very high premiums for the areas at highest risk

- Same price for the entire country making insurance affordable

- Reduced incentive to take risk mitigation measures

- Strong national solidarity principle

The insurance and reinsurance market - CAPACITY

In order to assess the feasibility of an insurance system, the total capacity of the private market, including both nationally operating insurers and re-insureres, needs to be assessed annually

Layer guaranteed by the Sate as the last resort reinsurer (models of unlimited or limited guarantee must be discussed such as that of Belgium which adopts a limited guarantee in which case compensations are proportionally reduced once the disaster has exceeded the overall capacity of the insurance market to repay)

Amount to be covered by international re-insurers

Compensation to be paid by insurers working at the national level

Non covered damage to be paid by victims

PUBLIC

PRIVATE

The key points of a proposal for legislation from the Insurer’s perspective

1. The insurable events: exceptional events (heavy rainfalls, floods, hurricanes, earthquakes, ….etc), for which «a state of emergency» must be declared by the Prime Minister on the basis of the report provided by the Head of the Civil Protection Department.

2. Insurable items: private residential houses, unless illegal, including parts devoted to commercial activities or artisans, if in a building that is mainly residential.

3. Insurance model: voluntary fire insurance with compulsory extra percentage for natural disasters (semi-compulsory model).

4. Determining the insurance premium: correlating premium to the risk index in each zone of the country, on the basis of an mutual distribution principle according to which the higher costs in the zones at most risk is partially reduced by highering the lowest costs in the zones which are least at risk.

5. Determining market prices: free market for insurance companies in covering the risks, given the minimum level of premium as discussed in the previous point.

6. Values to be insured: parameters setting in the value of full reconstruction established on the basis of methods established by specialized institutions.

7. Limits and deductibles: limits and deductibles will be established, possibly linked to the the capacity of local authorities to implement mitigation measures in a way that municipalities or regions can benefit from mitigation they implement.

8. Damage compensation: centralized management carried out by an authority that will be created for this purpose and which will manage all claims, including on site surveys to assess the damage on behalf of companies and the State.

9. The system should work on a private-public partnership principle: the State will act as a final reinsurer guaranteeing for the exceeding values that companies are eventually not able to cover as established in co-agreed contracts.

10. The State contribution: insurance against natural calamities is the only possible compensation system for damage due to natural hazards. In the transition between full State intervention and the insurance model, a progressive reduction of State intervention is expected.

11. Fiscal regime: the extra cost due to the coverage for natural calamities should not be taxed as insurance policies are currently at a rate of 22.25%. For the more disadvantaged social groups, the State will pay for their insurance. Funds created by insurance companies as a buffer should be exempted from taxation as well.

The experience of UnipolSai after the Emilia-Romagna 20th/29th May 2012 earthquake and the floods that occurred in Northern Italy in October/November 2014

A first issue that emerged from those experiences is the lack of knowledge in terms of mitigation and regarding techniques of “disaster recovery“ that is evident in the majority of large and small businesses.

UnipolSai intervened immediately in the affected areas and one of the priorities was to secure buildings, machinery and goods of affected businesses so as to reduce as much as possible the consequences for the production and to restart as quickly as possible

This was made possible by the fact that not only part of the compensation was provided in advance, within one month after the event, therefore going far beyond traditional compensation policies, but also because we provided a direct assistance service, with the intervention of technical experts and companies with experience in disaster recovery and cleaning up and with which we have specific contracts.

This recovery assistance, provided at the most critical moment for businesses totally lacking any skill in disaster

recovery and unable to find in reasonable time reliable recovery companies able to intervene, was one of key

success points of our action.

Apart from the direct assistance guaranteed in the phase ofemergency, UnipolSai proved to be very rapid in themanagement of surveys and compensations.

Thanks to a “team” of consultants, experts and collaborators, almost 100% of the insured were compensated within one year of the seismic events of May 2012 (about 1.200 claims totalling almost 200.000.000€).This is a really short time if compared to the time the State has generally spent to intervene in similar situations with public funds.

The consequences on the economic sector are greatly underestimated in these types of events.A study carried out by the European Insurers Association (CEA) has shown that indirect damage is on average 2.5 times greater than direct damage! In Italy only the 6% of firms has a coverage for indirect damages, whilst in Germany this ratio reaches 80% …!AIBA (The Association of Italian Brokers) has recently published research showing that 40% of firms suffer an interruption of their business activity because of an incident for more than three months close down within two years due to the loss of their market, and they cannot compensate for the accumulated financial damage. In the case of small and medium companies, this period is even shorter!

UnipolSai’s experience of the the aforementioned earthquakes is repeated when we look at hydro-geological events as in 2014: A year of floods!

19 january – Modena (Secchia flood)31 January – Ponsacco (PI) (levee failure on the Era river)3 May – Senigallia e Chiaravalle (Triponzio flooding)8 July – Milano (the Niguarda area flooded by the Seveso)21 July – Camaiore e Lucca (Freddana creek flooding)2 August – Refrontolo (TV) (centennial flood of the Lierza creek)4/5 September – Gargano (coastal and inner areas flooded)20 September – Romagna (levees failures in the Senio and Marzeno rivers)9/10 October – Genova (Bisagno and Ferregiano creeks flooding)11/12 October – Alessandria (floods in valleys of Scrivia, Orba and Curone)11/12 October – Parma (Baganza creek flood)14 October – Maremma (floods in Orbetello)14 October – Trieste (flood in Muggia)

Possible future developments

Regions where insurance companies insure a large number of firms against natural disasters (floods and earthquakes) are Lombardia, Emilia Romagna and Veneto.

Geography of firms exposed to natural disasters in Italyfonte: Perils 2013

The experience in managing claims and the more recent events of 2012 and 2014 have shown that Italian companies’ lack of attention paid to Risk Analysis and Loss Prevention. Furthermore, often their insurance coverage is unable to compensate for the real damage that can be expected given the levels of risk

As mentioned previously, not only is indirect damage not insured, direct damage is insured insufficiently too!There is little official data to validate this statement:

Ratio premiums for direct damage / GDP in Europe (data CEA 2012):- The Netherlands 8.9%- Germany 2,7%- United Kingdom 2.6%- France 2,3 %- ………- Italy 1,1 %

From the publication: Good practices for mitigation and financing catastrophic risks- December 2010:Government should consider using the existing insurance infrastructure for premium collection, loss adjusting, claims payment and distribution of insurance products, even if these products are backed by public money.

The pressure of international organisations including the OCSE on the Italian Government to introduce insurance policies against natural calamities

OCSE recommendations regarding best practices to finance and manage catastrophic risks

Financial protection tools, such as insurance, should be made available, either privately or publicly, to enable all economic actors to plan ahead before a catastrophe occurs. Private insurance regulation should allow the development of adequate insurance market capacity.

Government should consider using the existing insurance infrastructure for premium collection, loss adjusting, claims payment and distribution of insurance products, even if these products are backed by public money.

Insurance premiums should be based on risk: Risk-based insurance provides signals to individuals and firms as to the hazards they face, thereby encouraging them to engage in cost-effective mitigation measures that can reduce their vulnerability. In light of equity and affordability concerns, governments could provide financial assistance to purchase insurance and/or to adopt prevention and mitigation measures, rather than requiring insurers to set premiums artificially low.

European Commission’ s requests(given the 2007/60/CE Directive)

• The Green Paper on the insurance against natural and man made risks, 16/04/2013

The need to increase the penetration of insurance against natural

calamities is recognized and to “…..fully develop the potential of insurance policies and other financial tools to increase the awareness and the mitigation of risks and to promote long term resilience of investments and commercial decisions.”

Insurance companies are asked to share a strong social responsibility in the management of such risks, giving rise to a change that is to be pursued as far as the role of the State is concerned and setting up an insurance system protecting citizens from the potential damaging effects of climate change and natural disasters.

Who else apart from insurance companies can guarantee stability in risk transfer mechanisms from weak subjects, such as families, to financially stronger entities like national insurers and international re-insurers?

Possible advantages for the State:

• reduce public expenditure and manage natural risks according to a Risk Management approach• favour prevention and interventions of relocation and risk mitigation at all levels: - legislative (i.e. building codes) - town and country planning and protection (i.e. PRG) - technical and scientific (i.e. new technologies) - educational (training for public officials and citizens)• adapt legislation to that of the other European countries

Possible benefits for citizens:

• increase the level of protection for their goods• move from a culture of excessive state aid to that of prevention• lower fiscal pressure through a better use of public resources• count on faster compensations• obtain more transparency and homogeinity in the treatment of compensation

One of our objectives is to move from a traditional model of claims treatment to a more complete service: the real problem for many firms affected by natural disasters is not only getting financial compensation but also to avoid stops to production with the risk of bankruptcy.

While waiting for a new legislation to be passed in Italy, UnipolSai is working hard to propose to its clients insurance products that are more innovative in this field also with the aim of increasing the culture of prevention in our country and resilience in the face of disasters and climate change (as with the Derris life project co-funded by the European Commission)

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Conclusions