Last year's floods in the Czech Republic thoroughly tested both the ability of domestic insurers to cope with damage and the quality of their reinsurance programmes. Ivan Ko(breve)cárnik has good news to report.

Floods are coming. That is an established fact and Czechs woke up to this bitter reality last year. After many years of clement weather and virtually no high waters in the heart of Europe, the Czech Republic experienced last June/July the worst natural disaster on record. This put the nation's developing insurance market to a cruel test, which it passed with flying colours.

The sheer scope of the havoc is evident from the following facts and figures: the overall damage has been conservatively estimated at 63 billion crowns, or about $2 billion. Damage sustained by insured property reached almost 11 billion crown in a situation when the annual casualty insurance premiums totalled 34.4 billion crowns. The enormity of the hardship is best evident in comparison with the country's gross domestic product - the damage done amount to just under 4% of last year's GDP. Seen from this angle, and viewed globally, this must have been one of the worst natural disasters in 20 years. Heavy rains and floods - the heaviest for centuries - hit hard mainly in the eastern parts of the Czech Republic, with northern Moravia alone being literally washed away with 1.7 cubic kilometres of precipitation. Massive floods were reported also from Poland, Germany and, to a lesser extent, from Slovakia and Austria.

In terms of insured property, the brunt of the national damage was clearly borne by (breve)ceská poji(breve)st'ovna. We had to cope with almost 95,000 out of the 120,000 claims notified. According to current estimates, insurance companies will have to pay damages totalling almost 11 billion crowns, of which nearly a half (over five billion crowns) must be provided by (breve)ceská poji(breve)st'ovna. Damage to private property, payable by (breve)ceská poji(breve)st'ovna, is estimated to be in the vicinity of three billion crowns, and losses sustained by the corporate sector (over 6,000 claims there), exceeded the two billion crown mark.

Obviously, losses this great came as a nasty shock for everyone - for private citizens, businesses, government officials, and naturally also for insurance companies. Fortunately, (breve)ceská poji(breve)st'ovna and most other Czech insurance companies calculate the flood risk into householders' policies. Therefore, clients would have been able to shift at least part of their property damage claims on to the shoulders of their insurers. In reality, though, and in the wake of the lifting of price controls in the early 1990s, many people had failed to renew their policies, which they thought to be very costly. As a result, only about 45% of households and private property were insured. In the field of industrial risks, Czech insurance companies today routinely emulate the example of their German counterparts, whereby flood risks are not normally covered without extra premium loading. Logically, therefore, demand for insurance increased dramatically in the wake of the floods - among both companies and private citizens.

Last year's floods thoroughly tested both the ability of insurance companies to cope with damage and the quality of their reinsurance programmes. It is safe to conclude that most Czech insurance institutions passed this test. According to data provided by the Czech Association of Insurance Companies - which represents over 30 commercial insurers whose combined share of the national market exceeds 99% - its member organisations settled by early December, ie, within five months after the floods, claims to the tune of 6 billion crowns and, by the end of January, the payments approached a total of 7 billion crowns. (breve)ceská poji(breve)st'ovna along with a 60% slice of the insurance market pie, settled within five months after the floods 84% of claims - a figure on par with the speed of claims handling in the United States and other advanced Western economies. Impressively, most Czech insurance companies were still profitable last year, regardless of the floods.

The good results scored by (breve)ceská poji(breve)st'ovna can be ascribed to its sound, long-term reinsurance contracts with the highest-rated international reinsurers. Most of them are with the Lloyd's syndicates, in addition to SCOR, Sorema, SAFR, Hannover Re and others.

Last year's floods actually proved that even central Europe may be vulnerable to natural catastrophes of great magnitude. (breve)ceská poji(breve)st'ovna meets this challenge by vastly extending the scope of disaster reinsurance with both the traditional leading reinsurers as well as the newly emerging Bermuda capacities (in conjunction with, for example, Partner Corporation, which has Swiss Re among its major shareholders, and with MidOcean).

The Czech government as well as the entire insurance market took measures to minimise the impact of natural disasters. It shows that in emergencies, insurers and reinsurers must work closely together and share the risks and responsibilities with the state. The Czech government has participated in the implementation of preventive measures and has also allocated funds for this purpose. Members of the Czech Association of Insurance Companies have agreed to contribute their findings and experience, accrued during last year's floods, towards drawing new flood maps and to ascertain which of their clients may be affected and to what risks they may be exposed. In this way, future risk mapping will be far more accurate than it is today. Last year's natural disaster highlighted the value of international co-operation among insurers, the significance of reinsurance in risk adjustment, and the need of international unification of applicable emergency rules and procedures. (breve)ceská poji(breve)st'ovna, the nation's biggest insurer, carries the torch of this effort and, as a member of the Czech Association of Insurance Companies, is working to help create conditions for harmonising emergency procedures with EU legislation.

It should be noted, however, that the Czech Republic has come a long way to bring its insurance laws in line with EU laws and directives. We are proud to report that as of 1 April 1998, Czech insurers have their representatives in the EU's Brussels headquarters. The Czech Association of Insurance Companies followed suit by creating the post of Secretary for European Integration.

However, much work has yet to be done. Chief among the future tasks is amending the existing insurance law in time for a government debate this coming autumn. The proposed amendment should give extended new powers to the State Supervision Authority over insurer finances. Requirements for the insurers' minimum equity correspond with EU legislation and the assessment of the class of life and non-life insurance basically tallies with EU standards. But the proposed amendment introduces also certain liberalising elements - ie it no longer requires mandatory approval of general insurance terms and conditions by the Ministry of Finance. Other essential changes required for the Czech Republic's accession to the EU envisage replacing the current system of motor liability insurance by a system which is compatible with EU standards. The Czech government recently gave the go-ahead to the appropriate draft legislation on the assumption that price controls will be gradually lifted from the year 2000 onwards.

Changes will be effected also to regulations concerning insurers' technical reserves and to legal standards concerning the solvency of insurers. Developments on the insurance market have indicated the need to adjust or extend modalities of handling reserve stock and making investment a safer option. Last year's floods have also revealed the necessity of accumulating reserves for the compensation of abnormal risks.

Regardless of the many objectives to be met before the Czech Republic can join the EU, it is safe to assume that the Czech insurance market has all the attributes applicable to the advanced Western nations. To date, 41 insurance companies have obtained their Finance Ministry operating permits, and the scope and quality of their products meet the required European standards. Much of the credit probably goes to those foreign insurers who either have set up new companies in the Czech Republic or are operating subsidiaries in this country. In order to get a bigger slice of the national market they offer the best and most successful products of their parent companies. Most domestic insurers have been quick to adapt to the new conditions and the Czech insurance market, which ranked among the most advanced in the period before World War II, is again destined to become fully competitive in the demanding EU environment.

Ivan Ko(breve)cárnik is the chairman of the board of (breve)ceská poji(breve)st'ovna.