Hamish Dowlen, Senior Vice President
2008 Reinsurance Market Position
The Czech Republic has sufficient excess of loss catastrophe capacity available. Competition was quite strong during the renewal, although the reinsurance market remained harder than had been expected originally. The purchase of one major group program for the entire Central and Eastern European (CEE) region was transferred to Prague for the 2008 renewal, resulting in an increased focus on the Czech catastrophe market. However, two of the largest insurers in the market continue to be protected against natural perils within their parent companies’ group programs, which are purchased from outside the Czech Republic. In the non-life line, the top five companies comprise 85 percent of the market.
Following losses from snow pressure in 2006 and Windstorm Kyrill (“Kyrill”) in 2007 – both of which affected the bottom layers of most Czech catastrophe programs – there was pressure from reinsurers to raise retentions once again. Despite this factor, the increases that did occur were not significant. The annual aggregate feature for snow pressure and frost continued to be standard in most catastrophe programs.
The Czech Republic’s major natural perils are windstorm, hail, and (predominately) flood. Flooding is common in summer, when rainfall is at its highest. But, it may also be caused by snowmelt in the winter. The river valleys of Moravia and the southern, middle, and northern parts of Bohemia are the areas most exposed to flood risk. As the severe floods in July 1997 demonstrated, though, almost every part of the country is potentially exposed.
The most recent flood disaster to hit the Czech Republic occurred in 2002, resulting in insured losses of around USD1.3 billion – more than 95 percent of which was covered by the reinsurance market. This insured loss represented 50 percent of the country’s total economic loss that year. Thus, the authorities are acutely aware of the flood risk and have invested considerably in loss prevention and particularly in upgrading flood defenses in the major urban areas considered to be at risk.
Source: Guy Carpenter & Company, LLC, G-CAT
The only significant catastrophe loss of 2007 was Kyrill, which occurred at the end of January and took the CEE region by surprise. The Czech market had not been affected by heavy storms for many decades, but Kyrill’s path fell directly over Northern Europe and extended eastward into Poland, the Czech Republic, and as far south as Austria. The Czech Republic’s estimated insurance market losses from Kyrill reached USD138 million (according to the Czech Insurance Association). But, the Czech Republic’s storm risk is substantially lower than that of its western neighbors (e.g., Germany), and flood is considered to be a far greater threat.
There is also some limited regional earthquake exposure, but it is considered a much smaller risk than flood or storm.
The Czech insurance market is the second largest in CEE (after Poland). Premium volume in 2007 for non-life products was USD4.9 billion, and insurance penetration levels are higher than in most other CEE countries, with non-life premium spend per capita of around USD250.
Since the Czech Republic suffered its worst-ever natural peril loss with the floods of 2002, awareness of this risk has been high – as is demand for flood cover. The insurance market maintains highly sophisticated controls over the availability of flood coverage, generally applying strict sub-limits to commercial and industrial risks (maximum coverage per industrial risk is normally USD6.4 million, though this can be increased using the first-loss limits of several co-insurers). Insurers also employ an advanced underwriting tool to recognize risks in highly exposed zones. The underwriter then can sub-limit (or exclude) flood coverage in certain policies. Flood still tends to be covered automatically by the majority of household insurers, though it is generally sub-limited.
A Guy Carpenter-developed flood model for the Czech Republic was successfully released in autumn 2007 and is used by a large number of insurers operating in the Czech market to help understand their potential exposures.
Storm risk is generally covered for up to full-value for household policies. Coverage is offered as an optional extension on commercial and industrial risks, reflecting the relatively low level of the hazard. In January 2007, however, the Czech Republic suffered an unexpectedly high loss from Kyrill. The loss serves as a reminder that the country is situated at the eastern extremity of the northwestern European storm paths.
Earthquake cover, when purchased, is provided on a full-value basis. Although some insurers offer cover automatically, interest is not particularly high.
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- Luboš Houska, Vice President