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This conference has been a good opportunity to unfold the problems raised by insufficient coordination between the EU institutions and the Member States regarding risk identification and risk assessment, prevention policy as well as civilian intervention and public authorities’ intervention in the treatment of natural catastrophes. There is a spectrum between free market-oriented insurance schemes (e.g., UK and Germany) and solidarity-oriented insurance schemes (e.g., Switzerland and France). There is room for improving the trade-off between these two poles. The conference speakers pointed to an array of ways in which public authorities and insurance companies can join their efforts in developing a comprehensive prevention and insurance policy in the face of such devastating natural catastrophes as tsunamis and earthquakes whilst allowing insurance companies to distinguish themselves on the basis of free market rules. The State can provide tax incentives or direct grants to incentivize the insurance sector in covering large scale natural disasters. It can also act as a re-insurer or as a major shareholder in private insurance companies specialized in natural catastrophes. It can furthermore conclude partnership agreements with insurance companies whereby it agrees to provide a solvency guarantee vis-à-vis their creditors. A common EU-wide framework for the profession of experts in claim evaluation and settlement would also be highly advisable given their crucial role in processing reimbursement claims in the event of natural catastrophes. The EU institutions, Member States’ public authorities and the private insurance sector all need to be able to use reliable statistical data when assessing risk probability associated with natural catastrophes, hence the appropriateness of Commissioner Barnier’s initiative on “statistical mapping”, which would reflect the best statistical practices on risk coverage.

As a matter of general consideration, Emanuela Bellan (Head of Unit, Crisis Management Unit of the Secretariat General, European Commission) conveyed to us that EU’s intervention is the result of a balancing between subsidiarity and solidarity. In the phase preceding a natural disaster, the EU stresses prevention and preparedness whereas in the period postdating a disaster, the EU addresses possible responses and recoveries. EU’s action is always coordinated between its institutions and Member States, in cooperation with relevant partners such as international organizations, NGOS and third countries. She referred to the following as useful tools available at the EU level: the Council conclusions dated 8 and 9 November 2010 on innovative solutions for financing disaster prevention[1], the Cohesion policy funds available to support project[2]; and the Solidarity fund.[3]

Gabriel Bernadino (Chairperson, EIOPA) stressed the fact that data are important in order to increase risk awareness and protect consumers. Based on the EC Joint Research Center’s Report of 18 October 2011, it appears that risks are heterogeneous among EU Member States: national catastrophic insurance markets would not seem to be coping with the same risk in all EU Member States. A dedicated insurance market would be developed for some perils but not for all (e.g., storm). There would be mixed results on how ex-post government intervention is going to influence penetration rates.[4]  

Reinhard Mechler (International Institute for Applied Systems Analysis) referred to the Economic Instrument Adaptation Study of DG CLIMA, which calls for more insurance and economic instruments.[5] Insurance companies have a role to play in the development of risk finance instruments. If the risk is priced correctly, more insurance contracts will be taken out, and incentives to avoid risk will be stimulated. The importance of PPPs is highlighted as a joint task for risk reduction in this respect as well as the availability of accurate risk data. A functional insurance market has to account for effectiveness (financial adaptation and incentive adaptation), solidarity, and applicability.

Kristalina Georgieva (Commissioner in charge of International Cooperation, Humanitarian Aid and Crisis Response) claimed that Europe is the continent most vulnerable to natural disasters due to its high concentration of population on a small territorial surface. For the Commissioner, the role of the insurance sector in respect of natural disasters is important for three main reasons: (i) its expertise in risk analysis; (ii) its role as a new pillar for financing reconstruction after a natural crisis (public budgets alone cannot handle major disasters, as shown in the case of Japan); and (iii) its market-based instruments sending the right signals to businesses and individuals with a view to promoting risk awareness. The Commissioner here urged for more research-oriented investments in Europe and, generally speaking, more cooperation mechanisms between public authorities and the insurance sector.

Professor Pierre Picard (Ecole Polytechnique, Palaiseau) stressed the large variety of national disaster regimes prevailing in Europe. Whilst countries like Germany and the UK mainly rely on private market natural disaster insurance schemes (i.e., schemes based on actuarial risked-based premiums), other countries like France and Switzerland place more emphasis on solidarity mechanisms (i.e., regulated insurance pricing characterized by a flat rate). He compared the flood insurance system in the US (NFIP) with the one in France. In both jurisdictions, he noted the important role of local authorities (perceived as essential actors in the prevention of natural disasters). Additionally, both jurisdictions would rely on a solvency guarantee provided by the Government. Professor Picard argued that the trade-off between solidarity and free market could be ameliorated, amongst other methods, by having Governments prioritize subsidies, by allowing for tax cuts on property insurance in the low risk areas and by strengthening local authorities’ involvement. He expressed his preference for direct grants as a way of best targeting solidarity. He concluded by saying that providing insurers with incentives was crucial, which could be achieved through tranches of private reinsurance or catastrophe bonds or through Government solvent guarantee for exceptional events.

Eugene N. Gurenko(World Bank) observed that Southern Europe (in particular Greece, Italy, Portugal and Spain) was most vulnerable to earthquakes of a magnitude equal or superior to 3.0. Earthquakes are the worst natural disasters in terms of economic losses and number of victims. According to Eugene Gurenko, there are three main ways of improving efficiency in the delivery of catastrophe insurance coverage: (i) effective consumer education; (ii) review and harmonize Government’s post-disaster assistance policies across the EU; and (iii) catastrophe insurance product standardization across the EU, e.g. same terms and conditions.

Michel Barnier (Commissioner in charge of the Internal Market and Services) identified three poles in the PPP, namely prevention, education and reliability of statistical tools. Prevention is an important pole and has to involve local authorities, civil society and insurance companies. The European Structural Funds ought to be available to regions ready to subsidize prevention initiatives. Education regarding risk culture is another important pole: there needs to be a ‘financial education’. Michel Barnier clarified that response to risks provoked by natural disasters could not just emanate from the State. As for statistical tools, in order to produce good legislation, it is important to be able to rely on solid statistics. The Commissioner described EU’s possible added value in the form of a “Force Européenne de Protection Civile” (European Civil Protection Body) that would convene Member States’ and NGOs’ experts with a view to identifying different types of catastrophes (e.g., earthquakes and tsunami, nuclear and industrial accidents, and terrorism) and to making communitarian the national intervention units.[6] The latter, if made truly European, would become less expensive to operate and be in a position to react more efficiently in the face of a natural catastrophe. He described three possible prospects for the Internal Market Directorate to address the question of the relation between the insurance sector and natural catastrophes. First, the profession of expert in claim evaluation and settlement need be recognized at the EU level, thereby making the adoption of a common professional framework necessary. Second, there need be an information obligation (at the pre-contractual level) governing non-life insurance policies such as natural disaster insurance schemes, especially given that insurance contracts get increasingly sophisticated and technical. Third, he underlined the impact of the ‘Solvency II’ Framework Directive[7] upon the insurance sector, which would be supplemented by an ‘Omnibus II’ Directive.[8] Commissioner Barnier also announced that a public consultation procedure would be launched on the basis of a Green Book. It would seek stakeholders’ comments on the role of insurance in natural catastrophes.

As a word of conclusion, it may be worth briefly elaborating upon Michel Barnier’s letter of 1 June 2011 addressed to the European Insurance Industry. In this letter, the Commissioner wrote that the EU insurance law regime before Solvency II was not risk-based and needed to be adapted to the insurers’ current management practices.[9] Solvency II, once transposed into all EU Member States’ national laws, would compel insurance companies to maintain a capital that is in reasonable proportion with the nature of their business risks. In that respect, the Directive introduces a distinction between Minimum Capital Requirement (‘MCR’) and Minimum Solvency Requirement (‘MSR’). Whilst the MCR is calculated on the basis of absolute floors as tempered by a number of variables, the MSR is calculated by reference to a risk-based approach that builds upon a full or a partial internal model (to be approved by the supervisory authorities).[10] The MCR will have to be between 25% and 45% the amount of the MSR.[11] The level of supervisory intervention over insurance companies will vary depending on whether the capital falls below the MCR or the MSR, although in both cases the insurance company has to inform the supervisory authority about its financial situation.[12] If the company’s capital went below the MSR level, the supervisory authority would have to approve a recovery plan submitted by the insurance company. In the event the company’s capital went below the MCR, the level of supervisory intervention would be higher: the supervisory authority would have to approve a short-term realistic finance scheme, and have the power to freeze the company’s assets and even to withdraw its authorization if its finance scheme were ‘manifestly inadequate’.[13] Member States have until 31 October 2012 to transpose this framework Directive, which is expected to ameliorate consumer protection, reinforce EU insurance companies’ international competitiveness and update the insurance supervision legal framework.[14] This Directive should make the insurance sector more apt to address risks of large scale natural catastrophes.