The UK’s public/private proposition sets a template, but will other countries follow?
European flooding has never been costlier, or had a higher profile. Germany, the UK, Spain, France, Hungary and Italy have all experienced severe flooding in the last few years.
“The overall level of [European] flood losses that we see are increasing,” says Swiss Re head of flood Jens Mehlhorn. “We have very strong increases of flood in the last 20 years, much faster than economic development in most of the countries.”
But where there are floods, there are opportunities for the insurance and reinsurance industry. Prompted by severe flooding in the last five years, the UK government signed a landmark deal with insurers in July that aims to guarantee a hybrid flood insurance scheme between the public and private sectors.
The high-profile deal has raised awareness of the possibilities of this type of partnership for insurers, but few other European countries have this system, relying instead on the state to pay for flood damage.
Here GR examines the state of European flood insurance, and explores if and how insurers and reinsurers could benefit if the UK-style public/private partnership is adopted by other countries.
Flood insurance has a generally low penetration across Europe. A draft report by the European Commission’s joint research centre in late 2011 says: “The only MS (member states) where the rate of penetration is high are those where flood insurance is bundled to another policy.”
Most countries where flood insurance is available also have some form of state involvement alongside the private market.
But for European countries except the UK, the state’s involvement tends to hinder the uptake of private insurance, as homeowners and businesses have no incentive to buy cover.
VIG Re chairman Martin Hartmann says: “When there is a big flood, the government helps and compensates for the losses. But the people do not have a big incentive to buy insurance, because they rely on the government to help them.”
Insurers are further hamstrung from writing flood insurance in France, Spain and Switzerland, where politicians set flood rates.
Mehlhorn says that the main reason for the private insurance markets being subdued is socio-economic. “It depends a bit on the political system, but also on the people in each state,” he says. “In France, they expect more from the state than in the Anglo-Saxon system where you feel more self-responsible.”
He adds that the advantage of the UK system is that it leaves insurers free to set their own premium levels, but the model is not perfect. The ABI and UK government were locked in debate about the system for years, and have missed the original deadline to set up their proposed new model.
So is the UK model applicable to other European countries? Sadly for insurers and reinsurers, this is unlikely to happen in the near future, as the different countries’ flood protection schemes have long histories, are firmly embedded and would be difficult to change.
But one positive point on the issue for the insurance sector comes from the European Commission and the European Federation of Insurance Intermediaries (Bipar). Both bodies have recently called for greater insurance penetration for natural catastrophes, and stressed the importance of collaboration between European governments and the insurance sector.
For example, Bipar has recommended that the insurance sector could work with governments on drawing up more detailed flood maps to help both sides cope with inundations.
Additionally, Bipar has recommended that European governments invest in flood defences, and leave insurers and intermediaries to handle the insurance, in dialogue with governments.
So, while the UK public/private partnership that rewards the entrepreneurial insurance sector may not become widespread in other countries, there is hope that some form of collaboration might improve the lot of property owners, governments and the insurance sector. Let us hope that national governments agree.