Andrea Folegani, Senior Vice President
2008 Reinsurance Market Position
Reinsurance rates have declined by 10 percent through 2008, with capacity mostly available from European reinsurers. This continues the rate-drop trend to its fourth consecutive year. The London market tended to be less competitive, as top layer rates on line (ROL) slipped around the 1 percent mark. Bermudian capacity showed more interest for Italian catastrophe programs, particularly for the purpose of diversification.
The total estimated catastrophe capacity needed by the Italian market is in the range of EUR3 billion to EUR3.5 billion.
Catastrophe reinsurance treaty structures changed slightly changed during the last renewal. Flood cover is now available through a whole program, while in the past, it was sub-limited to earthquake, with large, single, stretched top layers. Most catastrophe programs are based on a return period of 250 years, and RMS is the most widely accepted modeling tool in the Italian market.
The following chart illustrates the large differences that exist between companies in terms of their risk profile. Most companies’ retentions are relatively low. Company 6 has the largest ceded limit. Not surprisingly, the ROL for this company is low, given that higher layers cost less than lower layers.
Though Italy is heavily exposed to natural perils such as earthquake, flood, and landslide, the country experienced few natural catastrophes in 2007 - with the notable exception of heavy rain in August. This event, however, caused only a negligible amount of insured losses.
Italy’s earthquake exposure results from the fact that it is crossed by a seismic fault. Sixty-seven percent of the country’s municipalities are at risk. Further, 3,671 Italian municipalities (45.3 percent) are classified to be high-risk areas for flood.
Despite such risks, Italy has no obligatory insurance scheme for natural catastrophe perils. Any relevant losses from the above risks tend to be covered by the government through ad hoc financing. During the period 1997 to 2003, the total amount needed for insured losses was estimated to be EUR32 billion, while the actual amount which was then made available by the state represented just 42 percent (EUR13.4 billion) - leaving a gap of approximately EUR20 billion of economic losses.
Italian insurance coverage for natural catastrophes is available, though it is mostly for industrial and large commercial risks. Only 25 percent of overall national fire premiums come from personal lines and of this only 17 percent includes the natural catastrophe extension, the percentage of personal lines business - including such perils - represents just 4.3 percent of the total.
The nationwide natural catastrophe project for residential risks, which was included in the 2005 Finance Act draft and would be managed by Consap S.p.A., came to a temporary halt because of government change.
The flood risk and its impact on the insurance industry over the past decade are evident. The 2000 flood in Piedmont, for example, caused insured losses of around EUR500 million, approximately 20 percent of all fire premium in the Italian market. This pushed for the development of SIGRA, the national flood model.
The ANIA (i.e., Italian insurer’s association) authorized and paid for SIGRA, which was completed and delivered by the end of 2007. This model will assist with insurance pricing, making probable maximum loss (PML) estimates for reinsurance purposes possible. But, the model requires a considerable amount of detailed information which is not easy to obtain.
- Gerardo Di Filippo, Assistant Vice President