December 19th, 2008

Austria: Catastrophe Reinsurance Market 2008

Posted at 12:50 AM ET

Hamish Dowlen, Senior Vice President

2008 Reinsurance Market Position

The 2006 “weight of snow” losses had an effect on the 2006/2007 renewal season, as many reinsurers had not previously considered this peril a serious risk for catastrophe programs. Due to the difficulty in ascertaining the duration of a weight of snow event, a number of programs abandoned an hours clause for this peril and introduced an annual aggregate feature instead. Loss-affected layers experienced modest price increases in most cases, but otherwise prices were stable or slightly reduced for the majority of companies.

The large international insurance groups in Austria now tend to cover Austrian natural catastrophe perils together with their international business (generally in other areas of Central and Eastern Europe) on a group basis. The domestic companies usually purchase a combination of catastrophe excess of loss and stop-loss, which is still freely available for the Austrian market.

Catastrophe Exposure

Austria is exposed to hail, flood, and windstorm, though flood is generally seen as the primary hazard. Floods occur in almost all parts of Austria, in particular within the Danube catchment area.

The largest-ever natural perils loss in the Austrian market was the flooding in August 2002, which also severely affected Germany and the Czech Republic. During these floods, the Danube reached its highest-ever level, resulting in a market loss for Austria of EUR400 million (USD600). However, due to the generally low purchase level of flood insurance, this was only a tiny percentage of the economic loss. More regional flooding occurred in August 2005 in the Tyrol and Steiermark areas, resulting in a market loss of approximately EUR120 million (USD180 million).

In 2006, the Austrian insurance market was surprised by a serious loss from the weight of snow, after experiencing no losses from this peril in decades. A prolonged period of snowfall and freezing temperatures between January and March resulted in an insured loss of approximately EUR150 million (USD225 million).

Windstorm Kyrill swept across Austria in 2007, reminding the market of this additional peril, though losses have generally been lower in recent years. Besides windstorms such as Kyrill, which affect mainly the northern part of Austria, the country is also exposed to regional events, usually in conjunction with thunderstorms and hail, occurring predominantly in the alpine areas.

In recent years, Austria was hit by two severe hailstorms. Localized hailstorms are more frequent, with at least one significant event each year (normally in the summer months). The largest recent event occurred in July 2000, resulting in a loss of approximately EUR175 million (USD263 million).

The earthquake hazard in Austria is considered low; however, roughly 15 earthquakes occur each year.

Insurance Availability

The Austrian insurance market is one of the most highly developed in Continental Europe, with non-life premium (including motor) of EUR6.1 billion (USD9.2 billion) in 2005. The frequency of natural perils events in Austria has resulted in an increased awareness of risk - and demand for coverage - among the population.

Windstorm and hail are generally covered as standard under residential policies, but are only included under the optional extended coverage section of commercial and industrial policies. The take-up is still relatively low.

Flood coverage has been difficult to obtain in recent years for anything more than minimal sub-limits. Householders can purchase cover as an additional section of the policy, but it is generally sub-limited to around EUR7,500 (USD11,250) per insured property, which is not nearly sufficient to cover a major flooding event.

Higher sub-limits are available for commercial and industrial risks, but policy deductibles are high, and it may be difficult to obtain cover for highly exposed risks. A few years ago, a small number of insurers began to offer coverage for up to 50 percent of full values, but take-up was low, as the product was only offered to buyers in areas with little or no flood exposure. The product is no longer marketed actively.

The flooding of 2002 and the lack of availability of proper flood coverage were catalysts to the market-wide HORA initiative. Led by the Insurance Association, HORA is a public-private partnership intended to establish a natural disaster zoning system, which divides the country into zones by flood and earthquake risk. The web-based tool allows insurers and private individuals to plot the location of their risk and ascertain the level of potential flood and earthquake exposure. The expectation is that HORA is the first step toward the establishment of a catastrophe pool in Austria, although no formal plans have yet been set. Earlier this year, Guy Carpenter released an internal probabilistic flood model, covering all major rivers in Austria, which is based on detailed data from the HORA initiative.

Earthquake risk is generally considered quite low in Austria, due to the lack of activity in recent decades. Similar to flood, full cover is typically not available for earthquake, but instead only provided under very low sub-limits of around EUR7,500 (USD11,250) for residential risks, with higher sub-limits for commercial and industrial risks. The one event of notable magnitude in recent years was a tremor south of Vienna in 2000, which reached 5.4 on the Richter scale but resulted in hardly any insured losses.

Having caused no losses for decades, the weight of snow peril has generally been included automatically within residential policies, along with windstorm and hail, and is available as part of the extended coverage package for commercial and industrial policyholders.

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Additional contributor:

  • Silke Huebner, Assistant Vice President
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