Conference report- Italian risk managers believe cat market will harden following Japan disaster

“In the next six months we will certainly see the hard market coming back,” said Paulo Rubini, risk manager at Telecom Italia, and president of ANRA, the Italian risk management association, in an interview. “The rates [for natural catastrophe risks] are driven by reinsurance, and the reinsurance market has been hit heavily.” “In terms of general capacity, I think the Italian market is still limited and the capacity is still expensive, and I am expecting it to be even more expensive after the Japan earthquake,” added Alessandro De Felice, group risk manager at Prysmian, a Milan-based provider of high-tech cables and systems for the energy and telecom industries. “Certainly, [the disaster] will reduce the capacity for nat-cat cover, which will increase costs.” But Jorge Luzzi, director, group risk management at Pirelli, and a vice president of FERMA, has his doubts that rates overall—and specifically in the Italian market—will rise as some global insurers will be more affected than others. Domestic market insurers in Italy may also see it as an opportunity to gain market share by keeping their rates steady. “What will happen? Nobody knows, but I am not fully convinced that this is the turning point,” Mr Luzzi said.hideThe views come as risk managers and insurance industry representatives are evaluating the lessons learned from the last major earthquake to strike Italy: a magnitude 6.3 quake in central Italy on April 6, 2009. That earthquake, which occurred in Italy’s Abruzzo region, resulted in some 300 deaths and caused significant damage, notably in the historic city of L’Aquila, where about 80% of the buildings in its centre remain cordoned off and inaccessible. To mark the second anniversary of the L’Aquila quake, Italian risk managers—among them Mr Rubini and Mr De Felice—came together last month in the nearby town of Tagliacozzo for a one-day conference to discuss various elements of the disaster, including the impact on the insurance market and risk management going forward. A main message was that the quake had raised awareness in Italy on the importance for businesses to assess their catastrophe risk, said Mr De Felice, whose company organised the conference in conjunction with Progetto Comune, a non-profit social and cultural association. “What is going to change and has changed [as a result of the L’Aquila quake] is the behaviour of business people, in particular the top management of companies, who now realise that there is a serious issue in terms of natural catastrophe exposure—not only for earthquake risk but also for floods and other natural events—and that proper prevention is needed,” said Mr De Felice, who served as the conference moderator. Mr De Felice said it is not just a matter of buying earthquake insurance, which is available in Italy for businesses, although not for homeowners. It is also a matter of investing money in prevention, such as by conducting an earthquake risk analysis and following through by upgrading buildings and equipment. “It is an investment that could be considerable for a large company,” Mr De Felice said, “so when I say that the mindset is changing, that is because this kind of investment is now considered an important investment.” The L’Aquila quake has impacted risk and insurance practices in other ways, as well. For example, as a result of the quake, Mr Rubini said Telecom Italia has obtained increases in the time periods covered under its extra expenses and business interruption insurance, from 12 to 18 months. “The predictions that we made in setting up this kind of cover were not correct. We had to rely on a more extensive period,” he said. But, generally speaking, there are some systemic shortcomings in risk management practices. Mr Rubini said there is a need to integrate company crisis management schemes with civil protection. However, the lack of public sector risk managers in Italy means it is difficult to establish that connection. “This is the difference between us and the UK where you have a lot of public sector risk managers,” he said. “In Italy, the public sector is very poor in terms of loss prevention and risk management.” Additionally, while large Italian companies take measures to address catastrophe risk, medium-sized companies lag far behind. “The large groups are okay...The problem is for the medium-sized companies without a risk manager,” said Nazareno Cerni, manager, corporate risks—Italy at Generali. Such companies either do not believe it is a risk or they do not know that coverage is available, he said. “In Italy, the state intervention has always been quite generous so they rely on the state,” Mr Cerni explained. “Despite all the problems that Italy has with finances and taxes and so on, the state—at the end of the day—has paid for reconstruction after natural catastrophe events.” The lack of an ‘insurance culture’ in Italy—as several market players said—is a reason the insured amount covered from the L’Aquila quake is so low. They stand at €400m in insured losses out of a total loss of €10bn, according to insurance representatives at the conference. The fact that 4% of the total loss from the quake is covered by insurance, versus a global average of 20%, shows that ‘Italy is largely underinsured,’ Mr Cerni said. “Insurance is definitely an efficient way to pay for damages and, sooner or later, even the government will realise that,” he said. But the long-standing effort to create a compulsory natural catastrophe scheme in Italy has stalled. The proposal calls for covering the cost of residential reconstruction by raising prices on homeowners and automobile coverage. However, there is a lack of political will since the extra premium is viewed by the public—and, therefore, politicians—as an added tax, conference participants explained. “I do not want to sound pessimistic, but I have big doubts [that the scheme will move forward] because we have been discussing this now for years,” said Maurizio Castelli, managing director Italy at XL Insurance. “It seems that there is no government [in Italy] that really has the courage to do that. It relates probably to the lack of insurance culture.” Steps taken by the government to build temporary housing complexes outside L’Aquila, following the quake, has only reinforced the idea that catastrophe insurance is not necessary, said Sergio Ginocchietti, director of claims at UGF Assicurazioni, the third largest Italian insurer. “People arrived in their new homes and they found a cake on the table and a bottle of champagne in the fridge, so of course the population wonders why they should pay the ‘extra taxes’ for an insurance scheme if, when something happens, the government will give me all this,” Mr Ginocchietti said. “It is a problem of culture.” Mr Luzzi of FERMA said one solution would be to develop a catastrophe pool, similar to the consortium used in Spain, in which all Italian market insurers would participate. Under the scenario, claims would only be paid if the government declared a natural catastrophe. “You need to have a lot of political courage to go with something like this, but it is possible,” he said. Whether a catastrophe pool or insurance scheme is established or not, Mr Castelli of XL said that for the business community—in particular the middle market—the issue is more about risk management. “If we cannot come up with a scheme, at least we can set up a better culture and better tools in terms of risk assessment, risk mapping and loss prevention,” he said. “A lot can be done in that respect.” However, Saverio Longo, chief executive officer of Zurich Global Corporate Italy, said that since risk transfer is so easy and rates for catastrophe cover are still so low, there is very little incentive for middle market companies to improve their risk management practices. “The fact that insurance coverage is quite cheap is not triggering any shift by customers to improve their risk management level or the quality of their buildings or the quality of their contingency planning,” Mr Longo said. “They have access to cheap risk transfer with insurers fighting against each other to ensure prices stay low. If they have claims and you try to increase the price, they just go to another insurer. “The paradox is we are not helping them by keeping the price so low,” he added. “If insurance was less easy to buy, or very expensive, I think they would think to start to organise themselves.” However, with insurers and some risk managers expecting that property rates in cat prone areas will increase following the catastrophe in Japan, a turning point in the Italian market may be approaching.

Conference report- Italian risk managers believe cat market will harden following Japan disaster

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