Dermott White reports on the substantial losses arising from the August floods, which enveloped large swathes of central Europe.

The total loss from the August 2002 floods that overwhelmed large areas of Europe, could be as high as $25bn. However, analyst reports and the reaction from re/insurance industry suggest that the industry is likely to escape much of that cost. That may be the short-term result, but the scale of the disaster has prompted another look at natural catastrophe insurance protection in Europe and the role that insurers and governments are likely to play.

Economic losses
Munich Re's initial estimate of the economic losses, brought out in late August, acknowledged that over 100 people died and said the flooding affected areas of Germany, Austria, the Czech Republic, Italy, Spain, Russia, Slovakia and Hungary. Its provisional estimate for the losses in the worst affected countries fell just short of ¤20bn ($19.6bn):

  • Austria: >¤3bn ($2.9bn);
  • Czech Republic: approx. ¤3bn ($2.9bn);
  • Germany: >¤10bn ($9.8bn); and
  • Italy: approx. ¤3.5bn ($3.4bn).

    A report from Swiss Re, released on 10 September, explained that the weather conditions started on 31 July when a high altitude low-pressure system triggered torrential rainfall in Scotland and northeast England. The same system then moved over Europe, generating heavy rainfall in Germany and, later, near Salzburg and lower and upper Austria on 6-8 August. This was followed by intense rainfall over Romania, South Bohemia and the eastern coastal regions of the Black Sea. On 8 August, the Swiss Re report said, meteorologists assumed that the intense rains had ended in Austria. The water levels of small and medium-sized rivers in Austria receded, and no problems were expected along the Danube.

    However, the situation changed rapidly with the development of a second depression. Before moving northeast, it led to heavy rain in northern and central Italy and generated torrential rainfall in upper Bavaria and Niedersachsen on 10-11 August. At the same time, north-eastern Spain experienced extraordinary rains. On 12 August, the rain reached the already devastated areas in the Salzburger Land, lower and upper Austria, Bavaria, Germany's New Lands and Bohemia, continuing relentlessly until 14 August.

    "During the flooding, some 60,000 residents were evacuated in Austria, a total of 200,000 in the Czech Republic and more than 100,000 in Germany's New Lands region alone. Some four million residents in Germany have been affected, and 100 fatalities have been reported across the continent," the Swiss Re report said.

    One of the reasons for the high economic toll from these events is that traditional flood plains have been developed over the past years to accommodate demands for new private and commercial buildings.

    "This has led to an increased concentration of values in flood-prone regions," Munich Re said.

    Insured losses
    Both reinsurance powerhouses were quick to point out that the insured losses would be substantially lower than the economic costs of the events, with both estimating that they would be in the region of ¤2bn ($1.96bn).

    This is consistent with a report on the floods, published for the Monte Carlo Rendez-Vous de Septembre, by the Benfield ReMetrics Natural Hazards Team, part of the Benfield Group. They estimate that the economic cost of the devastation could reach $25bn.

    However, the report said it expected the insured loss to between $2bn and $2.5bn: "Insured loss estimates have been more stable due mainly to the limited flood cover available in several of the countries affected. Economic loss estimates (covering both physical damage and business interruption) for Germany are currently up to $15bn, the latter being almost 1% of gross domestic product.

    "Insured losses as a proportion of economic loss varies greatly between the countries affected due to differing availability of flood cover and market take-up rates, which can also differ significantly between residential and commercial lines of business. For the Czech Republic the household insurance penetration rate is between 50% and 60%, whereas this figure drops to around 5% in Germany, which itself sees differing rates between former east and west states, due to differing policy wording histories. For commercial lines, Czech insurance penetration ranges between 30% and 50%, the latter value being similar to the German commercial elemental perils extension take-up; sub-limits can substantially reduce exposure, however. An overall European ratio of 10% to 20% insured to economic loss has been mentioned, suggesting total insured losses of $2bn to $2.5bn."

    This estimate does not look unreasonable after a glance at the preliminary loss estimates of some of the major re/insurers (see Table 1).

    Flooding in France
    Meanwhile, the Paris-based Fédération Française des Sociétés d'Assurances, the Federation of French Insurers, has estimated that the flooding that occurred in southeast France on 8-9 September will cost insurers ¤450m ($442m).

    The flooding caused serious damage, killing at least 21 people and causing a state of emergency across the region.

    Although most French property insurance policies include flood risks, insurer payouts will be offset by the Caisse Centrale de Réassurance (CCR), a government program that reinsures economic losses from natural disasters.

    France's largest insurer, AXA, said it expected to pay claims of around ¤75m ($73.6m) for flood losses but emphasized that reimbursement from CCR and other reinsurance would significantly reduce its net losses.

    What to do now
    Jon Gascoigne, one of the authors of the Benfield ReMetrics report, says the floods highlighted the relationship between the government and the insurance industry in each country in Europe.

    Each country's situation differs. In many of the former Eastern bloc countries, which had socialist state insurers, there is a general assumption that the government will pick up the bill for a national catastrophe.

    "Although, in saying that, there's [now] a greater appreciation of the role that the insurance industry can play with respect to efficiency of claims handling, for example," he said. "I think it's difficult to say [how it will go in the future]. There is a trade-off when you have the solidarity of widely available flood insurance, where the contributions of those that are less likely to be flooded effectively subsidise the premiums of those in more frequently flooded areas.... Equally, one can see across Europe thoughts of the idea of flood pools. For example, in Belgium, with their Canara scheme, which has been in the government machinery for many years. We've got the Norwegian perils pool, which works very well for windstorm and flood. And then France gives us another possible solution with its Caisse Centrale de Réassurance - the government reinsurance fund."

    It seems that the European Union (EU) is already considering these issues. On 11 September 2002, the European Commission the EU's executive body, cleared initial programs for a proposed billion-euro `Solidarity Fund' to tackle future disasters in Europe.

    EU Commissioner for budgetary affairs Michaele Schreyer said in a statement: "The recent terrible floods have clearly shown that people expect the EU to be on hand with financial help following disasters of this kind."

    The EC said it had approved a draft agreement between it and the other branches of the EU, the European Parliament and the EU Council of Ministers, which are formed by member states. Disaster relief of ¤500m ($491m) was to be made available immediately to Germany, Austria, the Czech Republic and Slovakia. From next year on, it said it wanted to build up the scheme to ¤1bn ($982m) per year.

    However, broker Aon, in its Natural Disaster Summary for August, quoted Terry Wynn of the EU Parliament's budget committee as saying that the parliament "would rather support ad hoc actions to cover the costs of future floods or other natural catastrophes ... furthermore the unpredictability of natural disasters makes it questionable to freeze EU money in future budgets". It is understood a similar type of proposal was rejected by the EU parliament during 1997, said Aon. According to reports, the then proposed fund of around ¤10m was considered too small and the rules and regulations applying in respect of any claims made were too complicated.

  • Dermott White is assistant editor on Global Reinsurance.