Projection of property damage due to hydrometeorological causes (flood and wind) and estimate of the extraordinary risk insurance scheme capacity in the context of climate change

Based on the compensation paid by Consorcio de Compensación de Seguros with regard to property damage caused by hydrometeorological causes (strong wind and flood) and on the sums at risk, a projection has been made for the next 30 years using certain assumptions so as to arrive to an approximation of the capacity of the extraordinary risk insurance scheme to cater for with the expected increase in hazardousness owing to climate change.

• Sums at risk, information coming from the statistical records that insurers send on an annual basis to CCS and which feature the data on policies issued or renewed over the financial year for risks covered by CCS.
   
• Surcharges revenue, which refers to the yearly surcharges according to the annual reports of CCS, without deducting the collecting commission retained by the insurers (5 %) by way of management expenses. These surcharges refer to all the causes covered by the extraordinary risk insurance: hydrometeorological, other natural causes and man-made causes.
   
• Compensation: amounts paid out and provisioned for in connection with loss reported and occurring in the series analysed, less deductibles and application of the proportional rule where appropriate. The sums are distributed according to the causes that are being examined in this paper (flood and wind).

• Given that, owing to the legal timing for presenting statistical records, the information on sums at risk in 2016 is not available at the time of writing of this article, it has been necessary to include an estimate for that year. A new aspect is that this estimate adds in a valuation of the portfolio of vehicles covered.
   
• For the sake of completion in gauging loss experience in 1987-2003 from wind damage according to the current definition of an atypical cyclonic storm (TCA, in Spanish) (1), the percentage of wind loss compared to flood loss has been calculated for the 2004-2016 dataset, resulting in a figure of 43%. This percentage has been applied to the 1987-2003 series.

• The sum at risk is projected from 2016, the last year in the dataset, by applying the average annual increase that has occurred over the last 10 years (2 %). This projection takes in both the increase in the number of policies (level of insurance penetration and new risks assumed) and the increase in sums for existing policies.
  
  It’s not a determining hypothesis as the rise in exposed value does not have a direct impact on CCS extraordinary risks insurance cover scheme: there is a direct relationship between exposure and income which CCS itself decides. In other words, surcharges collected by CCS are directly in proportion to the amount and value of risk exposure.
   
• Surcharges are estimated by applying the average rate for 2016 (0.126 ‰) to projected sums at risk. This projection equates to assuming that the distribution by risk classes and rates remains at 2016 levels.
   
• The compensation for the next 30 years is projected by applying the annual frequency for the past 30 years to the exposure for each year, corrected by a percentage adjustment for vulnerability due to the following reason:
  
  Within the orbit of hydrometeorological risks, data show the existence of a mitigating effect for vulnerability. As shown in Figure 1, there is no direct relationship between the increase in sums at risk -direct consequence of the rise of both insurance penetration and value insured in Spain- and the increase in loss.
  
  Figure 2, reflecting the mean costs –in 2016 euros- of hydrometeorological-caused claims, shows that the mean cost has reduced by two-thirds during the last 30 years. This downward trend in loss, being that the threat (frequency and intensity of flood and winds) does not seem to have varied much and that the sum at risk has been multiplied by five (Figure 1), can only be explained by a reduction in vulnerability. This vulnerability reduction can be attributed to a series of factors, such as better early warning systems, better hydrological and emergency management, land planning and risk awareness measures, as well as to the adoption of self-protection measures by the policyholders.