Government-backed catastrophe insurance schemes play a vital role in managing the financial impact of natural disasters across Europe. These programs provide a safety net for insurers and policyholders by offering coverage for extraordinary risks like floods, earthquakes, and other natural perils.
European government-backed catastrophe insurance scheme
In Spain, the Consorcio de Compensacion de Seguros (CCS) acts as a state-managed insurer, funded through mandatory surcharges on policies. France operates a comprehensive system through its Cat Nat scheme, supported by the state-owned CCR, which provides reinsurance guarantees for natural disasters. Germany does not have a national catastrophe insurance scheme, leaving insurers to rely on private mechanisms (see about European System for Natural Catastrophe Risk Management & Re/Insurance).
These schemes reflect varying levels of state involvement in disaster risk management. While some countries prioritize comprehensive government-backed solutions, others rely more on private markets.
As climate change intensifies the frequency and severity of natural disasters, the role of these schemes becomes increasingly crucial in supporting insurance markets and ensuring resilience for communities.
Comparison of Approaches
- Spain and France: Both have established robust government-backed schemes that reduce financial volatility for insurers and ensure widespread coverage for policyholders.
- Germany: Relies solely on private market mechanisms, which increases financial vulnerability for insurers and leaves gaps in coverage for high-risk properties.
- Italy: Aims to bridge the gap with its upcoming program for SMEs, combining state reinsurance through SACE and mandatory coverage.
These varying approaches reflect different levels of government intervention, market readiness, and risk management priorities in each country.
Spain: Consorcio de Compensacion de Seguros (CCS)
Spain’s catastrophe insurance framework is anchored by the Consorcio de Compensacion de Seguros (CCS), a government-backed entity that serves as a catastrophe insurer.
Spain’s nat cat insurance pool believes losses from flooding in Valencia and other parts of the southeast at the end of October will total €3.5bn and has record 225,332 claims so far.
The CCS is a unique and highly effective mechanism designed to protect both policyholders and insurers from the financial consequences of extraordinary risks.
Structure: The CCS is a state-managed entity that operates as a catastrophe insurer. It compensates for extraordinary risks, including floods, earthquakes, storms, terrorism, and certain socio-political risks.
Funding: It is financed by mandatory surcharges applied to all insurance policies. These surcharges are collected by insurers and passed on to the CCS.
Coverage:
- Natural perils (e.g., floods, earthquakes, volcanic eruptions, and storms).
- Risks associated with civil disturbances, terrorism, and certain socio-political events.
Effectiveness: Between 1987 and 2022, the CCS paid out €10.6 bn in compensation for extraordinary risks, with about 70% of this related to floods.
Impact on Market Stability: The CCS allows insurers to maintain a stable combined ratio, even in a disaster-prone environment. For example, the multi-risk property insurance combined ratio averaged 94% from 2014 to 2023, despite frequent weather-related events.
Recent floods in Spain, particularly in Valencia and Malaga, highlight the importance of the Consorcio de Compensacion de Seguros (CCS) in addressing climate risks, according to Fitch Ratings.
The CCS, a state-run organization, acts as a catastrophe insurer, covering losses from natural perils and socio-political risks. This government-backed scheme operates through mandatory surcharges on insurance policies, collected and remitted by insurers.
The CCS has historically played a key role in mitigating the financial burden of natural disasters on Spanish insurers.
Insurance compensation for extraordinary NatCat risks
Between 1987 and 2022, it paid €10.6 bn in insurance compensation for extraordinary risks, with approximately 70% attributed to floods.
Despite frequent weather-related losses, Spain’s average combined ratio for multi-risk property insurance remained a stable 94% from 2014 to 2023, reflecting the CCS’s stabilizing influence.
While the recent floods are unlikely to significantly impact the sector combined ratio, insurers face costs for hail damage in Valencia, which falls outside CCS coverage.
Spanish insurance sector multi-risk net combined ratio
Germany: Lack of Government-Backed Scheme
Germany, by contrast, lacks a government-backed catastrophe insurance scheme.
Even after events like the 2021 Ahrtal floods, which caused €11 bn in insured damage, no state intervention has been introduced. This absence leaves German insurers more exposed to the financial consequences of natural disasters.
Historical Context:
- Germany does not have a national government-backed catastrophe insurance scheme.
- Discussions about establishing a scheme have occurred after significant disasters, such as the 2021 Ahrtal floods, which caused €11 bn in insured damage.
- Despite this, no consensus has been reached on implementing such a program.
Private Sector Reliance: German insurers rely on private reinsurance arrangements to manage disaster risks. This makes them more vulnerable to financial strain during large-scale catastrophes.
Challenges:
- Lack of uniform disaster coverage means that some properties, particularly in high-risk zones, remain uninsured.
- Calls for a state-backed solution have not gained sufficient political or industry support.
France: Cat Nat and CCR
France operates the Cat Nat scheme, which provides comprehensive disaster coverage. The state-backed CCR (Caisse Centrale de Réassurance) offers unlimited reinsurance guarantees.
Insurers are required to offer disaster coverage and can reinsure risks with CCR, covering up to 100% of losses above a threshold. This system has been effective in ensuring market stability and prompt compensation for disaster-related damages.
Structure: France’s Cat Nat (Catastrophes Naturelles) scheme ensures comprehensive natural disaster coverage, supported by the state-owned Caisse Centrale de Réassurance (CCR).
Funding:
- All insurance policies include a surcharge to fund the scheme.
- Insurers must provide natural catastrophe coverage and can reinsure part of their exposure with CCR.
Reinsurance Guarantees: CCR offers unlimited reinsurance for losses exceeding certain thresholds, ensuring stability during severe disaster events.
Coverage:
- Natural disasters, including floods, earthquakes, and landslides.
- Coverage extends to both individual and business policyholders.
Effectiveness: This scheme maintains market stability by spreading risk across private insurers and the state. CCR’s ability to reinsure up to 100% of losses above a threshold ensures adequate compensation for policyholders.
Italy: Upcoming Mandatory Insurance for SMEs
In Italy, mandatory insurance coverage for natural perils will begin in 2025 for small and medium-sized enterprises (SMEs).
SACE, a publicly controlled reinsurance entity, will cover up to 50% of indemnities. This initiative aims to enhance market stability and expand insurance availability, though SMEs may take time to adapt to the new requirements.
Planned Introduction: Starting in 2025, Italy will mandate natural peril insurance for small and medium-sized enterprises (SMEs).
Structure:
- The government, through SACE (a publicly controlled entity), will play a major role in reinsurance.
- SACE will cover up to 50% of indemnities, ensuring shared risk between private insurers and the state.
Coverage:
- Perils such as earthquakes, floods, and landslides.
- Targeted at SMEs, which often lack sufficient insurance coverage for such risks.
Impact:
- The scheme is expected to improve market stability and increase the availability of insurance.
- However, the transition period may be slow as SMEs adapt to the requirements and as the program integrates with existing insurance frameworks.
European countries employ varied approaches to managing natural catastrophe risks, balancing state intervention with market mechanisms.
Schemes like the CCS and Cat Nat are viewed as credit positives for insurers, bolstering financial resilience and stability. As climate change amplifies the frequency and intensity of natural disasters, the importance of such systems will grow in sustaining insurers’ ability to manage risks and provide timely compensation to policyholders.
FAQ
Economic losses from natural catastrophes in the EU have been rising due to increased economic exposure and the intensifying severity of climate-related disasters. Between 1981 and 2023, these events caused €900 bn in direct losses, with over one-fifth occurring in the past three years alone. Climate change has amplified the frequency and unpredictability of extreme weather events, exacerbating their financial impact.
An EU-level approach could involve a public-private reinsurance mechanism to pool risks across regions and perils, stabilizing the market and encouraging broader insurance coverage. This mechanism would complement national schemes by increasing diversification and scalability. A complementary EU fund for public disaster financing could enhance risk management and support post-disaster reconstruction, with payouts tied to Member States’ implementation of climate adaptation and risk mitigation measures.
The CCS is a government-managed organization that provides catastrophe insurance to cover extraordinary risks, such as floods, earthquakes, and socio-political events. It helps stabilize the insurance market by compensating for natural and societal perils.
The CCS reduces the financial burden on insurers during natural disasters by ensuring adequate compensation for extraordinary risks. It maintains market stability, even in the face of frequent weather-related losses.
Spain and France use state-supported insurance systems like the CCS and Cat Nat, which provide extensive disaster coverage. Germany lacks a national catastrophe insurance program, relying instead on private insurers and reinsurers, leaving gaps in coverage.
France’s Cat Nat scheme ensures mandatory disaster coverage for all policyholders. Supported by CCR, a state-owned reinsurer, it provides unlimited reinsurance guarantees to cover losses above a certain threshold.
Italy will introduce mandatory catastrophe insurance for small and medium-sized enterprises (SMEs) in 2025. SACE, a government-controlled entity, will provide reinsurance for up to 50% of claims, aiming to enhance market stability.
These schemes protect insurers and policyholders from financial strain caused by natural disasters. They enhance market resilience and ensure timely compensation, which is vital as climate change intensifies disaster frequency and severity.
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AUTHORS: David Prowse – Senior Director, Fitch Wire, Oleg Parashchak – CEO Finance Media, Alberto Messina – Senior Director, Insurance Fitch Ratings
