2008 Reinsurance Market Position
The range of business available to reinsurers is very limited, as catastrophic and political risks are handled by the Consorcio de Compensacion de Seguros and not the private insurance market. Nevertheless there are some residual exposures (i.e. deductibles and event triggers) which may need to be covered in the open market.
The flood peril is the most frequent and serious cause of losses in Spain. In recent years, 93 percent of losses from natural catastrophes have resulted from flooding. Areas susceptible to serious flooding include the Basque Country, the area between Logrono and Zaragoza in the north-east; the coastal areas around Barcelona, Valencia, Almeria and Malaga on the Mediterranean, Andalusia around Granada, and Badajoz on the Portuguese border in the west (Extremadura).
The south and southeast of regions of Spain have most exposure to earthquake. The Pyrenees and the northwest are also exposed. In addition, there is the risk of a tsunami along the south and southeast coasts. Most earthquakes are of low intensity. However, the Pyrenees experienced severe earthquakes in the years 1427 and 1428, which wiped out many villages. More recently, a 7.9 magnitude earthquake hit Murcia in southern Spain in 1954, and in 2007, an earthquake of 5.1 magnitude was felt all over central Spain.
Other hazards include wind, forest and brush fires, hail, and freeze.
Covers for natural and man-made risk (including terrorism) are provided on a compulsory basis through a state run system. Developed in the middle of the last century, the Consorcio de Compensacion de Seguros (the “Consorcio”) is a government-run, compulsory system for “extraordinary risks.” Following the 1936 to 1939 civil war, the government set up the “Consorcio de Compensacion de Motin” to cover war damage. Subsequently, the Consorcio was extended to cover damage from natural disasters, which is now its principal role.
The Consorcio adds compulsory coverage to all property insurance policies. For coverage to apply, an occurrence must be “abnormal” in terms of victims and geographical scope. Perils covered include business interruption, direct damage to personal and commercial property as a result of earthquakes, tidal waves, floods, volcanic eruptions, and cyclonic storms - as well as acts of terrorism, rebellion, insurrection, riots, civil commotion and acts of the armed forces in times of peace. The premium rate is based on sums insured and is less than one per 1,000 for households. There is a compulsory surcharge that is collected by the insurance companies that issue the ordinary policy.
The following examples of rates per mille are charged for the Consorcio exposure in accordance with risk category and applied to sums insured for property damage and business interruption in the policy issued by a market insurer:
|Rates per Mille Charged for the Consorcio Exposure|
|Residential property and condominiums||0.09|
|Other simple risks (e.g., shops, shopping arcades, and warehouses)||0.18|
|Motorways, trunk roads, roads, railway tracks, and drainage works||0.34|
|All other harbors||1.95|
|Business interruption: homeowners, residents associations||0.005|
|Business interruption: all other risks||0.25|
Source: Consorcio de Compensacion de Seguros
The flat rates for vehicles vary in accordance with their category such as, for example, private car, truck or tractor and range from EUR2.7 to EUR31.9 per vehicle.
The following are excluded from Consorcio coverage: life, aviation, marine cargo, third-party liability, construction all-risk and erection all-risk (CAR/EAR), credit and bonding, loss of profits, sickness, legal defense, travel, crops and livestock.
After the 2004 Madrid bombings, it was decided to include the life business under the Consorcio cover. Travel with public transportation means is also covered. Loss of profits (as business interruption) is covered since 2004.
Consorcio provides coverage when the private company gives no explicit coverage, as well as when the private company does provide coverage but cannot meet its indemnification obligations (e.g., bankruptcy, temporary, or receivership).
As the earthquake risk is transferred to the Consorcio, cover is freely given by insurers for all types of risks. Neither the private insurance market nor the Consorcio carries out any form of earthquake accumulation monitoring. No computer modeling is performed.
Limits and Scope of Cover
The perils added to fire policies and multi-risk policies do not include cover for earthquake, with the risk being assumed by the Consorcio. When the cover is required, insurers simply collect from the insured the relevant premium calculated at the rate established by the Consorcio and forward it.
The Consorcio cover includes both earthquake shock and fire following; provided that it is a direct result of the earthquake. The sum insured for earthquake is the same as for fire, including risks on a first loss basis, or subject to a leeway clause or on a new for old basis.
Rating and Deductibles
There is no separate rate for the earthquake peril, as it is included in the total Consorcio rate. For property losses, there is a 7 percent deductible, applied to the total claim.