The Swiss insurance system

In terms of insurance against fire and natural hazards, Switzerland has a system that is regulated via the private sector as well as via the government. In 19 cantons, insurance coverage is provided by public building insurance companies (Kantonale Gebäudeversicherung, KGV). In the remaining cantons, private insurance companies are responsible for insuring buildings against natural hazards (9).

Vulnerabilities - Switzerland

Insurance - Storms

According to a study by Swiss Re and ETH Zürich (6,7), winter storms represent the largest loss potential for Europe and the second largest for Switzerland, where only loss potential from floods is higher. Storms represent the first cause of insured damages related to natural hazards within the Alpine area (8).

Several climate models were coupled with an insurance loss model and future damage by winter storms was examined. Results indicate that by the end of the 21st century (2071-2100), total losses in Europe could increase by 20 to 70% (compared to the reference period 1961-1990). In Switzerland, an average increase in losses due to winter storms by about 20% (0 to 50%, depending on the climate model) is expected (6,7).

Insurance - Floods

Calculations using regional climate models show that as a result of climate change, the return period of 5-day precipitation amounts (characteristic of long-lasting, intense precipitation) could halve in Central Europe in the future climate (2071–2100). A 100-year event would become a 50- to 100-year event, a 20-year event would
become a 10- to 20-year event (12). This change would have far-reaching consequences for flood risk and the resulting losses, and hence for risk assessment and risk management (14).

Insurance - Hail

Large parts of Switzerland are in an area of high hail risk in comparison to large parts of Europe. Accordingly, the loss potential is big. Since 1940, the large-scale weather patterns that are responsible for extreme hail events in Switzerland have increased considerably. If the frequency of these weather patterns also increases in the future,
more frequent hail events are to be anticipated (13). Since hail events are very local events, it is difficult to simulate them with climate models and to make forecasts about future changes (14).

Insurance - Awareness of climate change

For insurance companies it becomes more and more important to incorporate the latest scientific results into their business processes. They are moving from retrospective underwriting, based on past data, to prospective underwriting, taking future changes into account (6). If natural disasters become stronger and more frequent, insurers and re-insurers will have to raise premiums or limit coverage in order to be able to pay in case of loss. Preventive measures such as adapting and implementing urban planning and construction standards are necessary to make risks insurable again.

Much like public decision-makers, insurance companies base their operational practices only on the basis of past hazard events. Going from a pricing methodology based on past evidence to the inclusion of theoretical considerations surrounded by large uncertainties may prove difficult to accept for consumers, and to implement by insurers, especially within a competitive insurance sector. However, awareness of climate change is growing among Alpine insurers. In Austria, private insurers are funding the development of local climate change scenarios while in France a consortium of insurers is examining the consequences of climate change on insurance reserves and pricing. These efforts are still in an early stage and are yet to translate into changes in operational guidelines (8).

Insured losses - Globally

Globally, insured and total property losses are rising faster than premiums, population, or economic growth; inflation adjusted economic losses from catastrophic events rose by 8-fold between the 1960s and 1990s and insured losses by 17-fold. Large catastrophic events cause less damage in an average year than the aggregated impacts of relatively small events (a 40/60 ratio globally) (11).

In the United States, averaged over the past 55 years, weather-related events have been responsible for 93% of all catastrophe events, 83% of the economic damages of natural disasters, and 87% of the insured losses. ... The observed upward trend in losses is consistent with what would be expected under climate change and with demographic factors (11).

Vulnerabilities - Insurance overview

The insurability of natural disasters and extreme weather events may be affected by increases in the frequency, severity, or unpredictability of these events. ... Climate change presents various challenges to insurability. These include technical and market-based risks (11):

Technical Risks

• Shortening times between loss events, such as more hurricanes per season,
• Changing absolute and relative variability of losses,
• Changing structure of types of events,
• Shifting spatial distribution of events,
• Damages that increase exponentially or nonlinearly with weather intensity,
• Widespread geographical simultaneity of losses (e.g. from tidal surges arising from a broad die-off of protective coral reefs or disease outbreaks on multiple continents),
• Increased difficulty in anticipating "hot spots" (geographic and demographic) for particular hazards,
• More single events with multiple, correlated consequences. This was well evidenced in the pan-European heat catastrophe of 2003. Immediate or delayed impacts included extensive human morbidity and mortality, wildfire, massive crop losses, and the curtailment of electric power plants due to the temperature or lack of cooling water, and
• More hybrid events with multiple consequences (e.g. El Nino-related rain, ice storms, floods, mudslides, droughts, and wildfires).

Market-based Risks

• Historically-based premiums that lag behind actual losses,
• Failing to foresee and keep up with changing customer needs arising from the consequences of climate change,
• Unanticipated changes in patterns of claims, and associated difficulty in adjusting pricing and reserve practices to maintain profitability,
• Responses of insurance regulators,
• Reputation risks falling on insurers who do not, in the eyes of consumers, do enough to prevent losses arising from climate change, and
• Stresses unrelated to weather but conspiring with climate change impacts to amplify the net adverse impact. These include draw-downs of capital and surplus due to earthquakes or terrorist attacks and increased competition from self-insurance or other competing methods of risk-spreading.

Pressure on insurance affordability & availability under climate change

Extreme weather events have already precipitated contraction of insurance coverage in some markets, and the process can be expected to continue if the losses from such events increase in the future. Impacts vary, of course, depending on the specific circumstances, and can be relatively minor (gradual price increases) to more significant. For the United States, the following outlook has been presented for different types of issues (11):

• Flood - currently a mix of public/private insurance and risk sharing. Under climate change, insurability problems may extend from the present personal and small commercial lines into larger commercial lines.
• Windstorm—a largely insured risk at present. There are already considerable insurability problems and associated changes in terms and pricing, non-renewals, market withdrawl, etc. This could increase dramatically under climate change, resulting in shifting of losses to governments and consumers.
• Agriculture and livestock—currently a public/private insurance partnership. Climate change will stress this sector considerably, with potential for impacts due to drought, flood, pests, or other events on a scale with the Great Dust Bowl of the 1930s.
• Wildfire—currently largely privately insured. More retention of risk by purchasers of insurance and more involvement by state governments is anticipated, while insurers raise deductibles and reduce limits of liability and scope of coverage.
• Mold and moisture damage—largely commercially insured until the crisis emerged a few years ago. Now, many states have exclusions.
• Earth movement and coastal erosion—primarily insured by government, if at all. With permafrost melt, subsidence of dry soils, sinkholes will become more prevalent, as will mudslides and property losses from coastal erosion. Government programs covering storm-surge-driven losses on eroded property could be overwhelmed with losses under climate change, with the result of more retention by property owners.
• Health impacts—currently largely privately insured. An insurability crisis under climate change is not anticipated. Impacts will manifest in the form of elevated health insurance prices.

Vulnerabilities - Insurance Europe

It is estimated that losses from weather events are doubling globally every 12 years. Even though the observed increase in losses is dominated by socio-economic factors (such as population growth, increased number of habitations in vulnerable areas, increased wealth, increased amount and value of vulnerable infrastructure), there is evidence that changing patterns of natural disasters are also drivers (1). It is however not known how much of this increase in losses can be attributed to anthropogenic climate change (2). After accounting for changes in population and wealth, it has been shown that changes in extreme weather events may be responsible for a growth in losses by about 2% a year since the 1970s (10).

In Europe, 64% of all loss events since 1980 are directly attributable to weather and climate events (storms, floods and heat-waves) and 25% to wild fires, cold spells, landslides and avalanches, which are also linked to weather and climate. 95% of the overall losses and 78% of all deaths caused by disastrous events result from such weather and climate-related events. The annual average number of these weather- and climate-related events in Europe increased during the period 1998–2007 by about 65% compared with the 1980s (3).

Swiss Re has estimated that in Europe the costs of a 100-year storm event could double by the 2080s with climate change (to EUR 40 billion compared with EUR 20 billion today), while average storm losses are estimated to increase by 16–68% over the same period (3). Analyses of long-term records of flood losses indicate that societal and economic factors have played an important role in the observed upward trends (4).

According to an estimate by the Reinsurance Association of America (RAA), 50% of insured losses in the world within the last 40 years have been the consequence of natural catastrophes in the 1990s. Insurance experts have warned that large regions of the world may be recategorised as ineligible for insurance, because changes in weather caused by climate change (such as heat waves and hurricanes) continue at an accelerating pace (5).

Climate change is expected to lead to an increase in compensable damage, which will contribute to increased insurance premiums. This means that extreme events will result in an increased level of risk in the insurance sector. Climate change may lead to increased costs and maybe even the bankruptcy of insurance companies (5).

Flood risk insurance

Insurance and compensation systems for flood risk in Europe have been divided into three categories (15):

1. Traditional (private) insurance systems. This system is in place in most European countries (in 15 out of 19 studied countries). Systems are set up and managed by private companies, where the cover is financed from premiums that are paid before the event (ex ante). Some of these systems may have support from the government, for instance through state-guaranteed reinsurance. Countries where at least half the population has taken out flood insurance are: Portugal, Spain, France, the United Kingdom, Hungary, Norway and Sweden. Countries where less than half of the population has taken out flood insurance are: Italy, Greece, Austria, Slovakia, the Czech Republic Germany, Poland, Finland;
2. Insurance or pooling systems in which the government has a considerable role, through setting up and managing the pool. Cover is provided through ex ante premiums or ex ante taxes on insurance policies. This is the case in Belgium, Denmark and Switzerland. In Belgium, however, a compulsory insurance system has been put in place since late 2005;
3. Systems administered by the government, consisting of ex post compensation of flood losses. These systems are not considered to be insurance, as the basic property of ex ante premium or tax collection is not present. Rather, loss compensation is paid from tax money, either ad hoc or through budget reservations. Out of 19 studied European countries this system is only in place in the Netherlands.

Adaptation strategies

Insurance

Increase in premiums. If the intensity and frequency of loss events increase, insurance companies will have to raise premiums in the long term, in order to continue to be able to pay the arising losses. Premiums will
also need to be raised in the event of an increase in reinsurance cover and/or capital (14).

Adaptation of insurance conditions. Insurance conditions can be adapted. This can be achieved by a higher deductible, by exclusion, or by a cover limit. These adaptations could lead to losses being only paid in part by the insurance. With a deductible, the insurance pays for losses above a certain amount. This may encourage house owners to protect and maintain their houses in such a way that no predictable or avoidable losses arise (14).

Reinsurance. Reinsurance companies can spread their risk more broadly by buying cover for extreme events from other reinsurers (called retrocession) or via cat bonds on the financial market (14).

Spatial planning. In spatial planning, not only the present but the future geographical extent of natural hazards
will need to be considered (14).

Construction standards. Planners and builders should be encouraged to plan and to build with the future in mind (14).

References

The references below are cited in full in a separate map 'References'. Please click here if you are looking for the full references for Switzerland.

1. UNEP FI (2006), in: EEA, JRC and WHO (2008)
2. Höppe et al.(2006), in: EEA, JRC and WHO (2008)
3. EEA, JRC and WHO (2008)
4. Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)
5. Marttila et al. (2005)
6. Swiss Re (2006), in: Federal Office for the Environment FOEN (Ed.) (2009)
7. Frei et al. (2006), in: Federal Office for the Environment FOEN (Ed.) (2009)
8. Agrawala (2007)
9. Federal Office for the Environment FOEN (Ed.) (2009)
10. Muir-Wood et al. (2006), in: Ward et al. (2008)
11. Mills et al. (2005)
12. Frei et al. (2006), in: OcCC/ProClim- (2007)
13. Schär et al. (2004), in: OcCC/ProClim- (2007)
14. OcCC/ProClim- (2007)
15. Bouwer et al. (2007)