mag. monika gruber o.univ.-prof. dr. matthias bank department of banking and finance,
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Alternative risk transfer mechanisms against the background of the Austrian legal framework – a suggestion for improvement. Mag. Monika Gruber o.Univ.-Prof. Dr. Matthias Bank Department of Banking and Finance, Leopold-Franzens Universität Innsbruck, Austria in collaboration with: - PowerPoint PPT PresentationTRANSCRIPT
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Alternative risk transfer mechanisms against the background of the Austrian legal framework – a suggestion for improvement
Mag. Monika Grubero.Univ.-Prof. Dr. Matthias Bank
Department of Banking and Finance,Leopold-Franzens Universität Innsbruck, Austria
in collaboration with:
alpS GmbH – Centre for natural hazard management, and Hypo Tirol Bank AG, Austria
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Alternative Risk Transfer (ART)
• Risk transfer & Risk financing (self-insurance & risk retention)
• Insurance & Capital markets (convergence)
• Alternative because traditional financial products are applied to insurance issues, or vice versa
• Supplement to traditional insurance
• Standardisation and individualisation (tailoring)
• Multi-year, Multi-line, Multi-trigger
• Participation in positive loss experience
• Main field of application: natural catastrophes, liability, terrorism
ART & ARF
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Alternative Risk Transfer (ART)
Risk Finance ( ARF):
Funded Retention,
Self-insurance,
Provision of funds
“ex ante“
Risk Transfer ( ART):
Risk Finance (ARF) &
Risk Transfer in its
proper meaning (ipm)
ART & ARF
Retention
Risks are retained in the company:
DEDUCTIBLE & FINANCE
Risk Transfer ipm
Risks are transferred to another corporate entity:
TRANSFER
UnfundedPost-loss Financing
FundedPre-loss
Financing
Risk Finance
• Self-insurance• Captives• Contingent Capital• Finite Risk Solutions
Risk Transfer ibs
• Traditional Insurance• Securitisation: Bonds & InsuranceDerivatives• Insuritisation• Integrated Risk Management
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Reasons for ART
• Un-insurable risks: natural hazard, terrorism risk, technological risks
• Relatively high frequency and intensity of natural and technical catastrophes, climate change
• High population density, e.g. Tirol (Austria) 445 inh./km2 (2004)High-quality building materials additional insurance cover needed
• Insurance industry provides no/limited cover for certain risks
• Lack of insurance (capacity, supply, demand)
• Responsibility of the government?e.g. catastrophe funds, monopolistic/compulsory insurance
Need for alternative solutions …
ART & ARF
Reasons for
ART
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Reasons for ART - Austria
Limited Coverage for Property insurance against natural hazards:
Basler, Generali, GRAWE, Niederösterreichische, Zürich, Donau Versicherung, VAV
€ 5.000 oder 7.500
Allianz, UNIQA, Wiener Städtische, Merkur, Salzburger LandesV
Up to 50% of the insured sum [IS]
Tiroler Versicherung - Plus H.E.L.P. Alpin
€ 75.000 (IS < € 360.000)€150.000 (IS > € 360.000)
Business Insurance:Business interrruption, fire, theft, storm and certain natural hazards, liability, property etc. Combined business policiesAdditional catastrophe cover up to € 150.000 per event
!! Cumulation Clause: If the insurer‘s total claims exceed max. € 30 Mio., the damage compensations will be paid aliquotly.
ART & ARF
Reasons for
ART
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Reasons for ART
ART & ARF
Reasons for
ART
Why is there a lack of insurance?
Difficult and expensive risk simulations necessary for proper insurance of low frequency – high severity risks
Consequently premium calculation problematic
High cost of reinsurance of certain risks
Low demand for cover against natural hazards (?):
“A once-in-a-hundred-years event is expected to occur once in a hundred years. So, why insure after the occurrence of such event?”
No capacity on the (Re-)Insurance market
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Reasons for ART
ART & ARF
Reasons for
ART
… Why is there a lack of insurance?
Reinsurers’ interest: limited supply of cover higher premium,
less risky portfolio higher equity returns
shareholder value maximisation
Agency issues, moral hazard, adverse selection
Governmental Intervention – public funds
e.g. Austrian Catastrophe Fund with approx. € 250-400 Mio. annual compensation capacity (already insufficient after flood 2002 and 2005)
e.g. Austrian Terror Pool – conjoint damage compensation through Austrian insurance companies up to € 200 Mio., no state guarantee
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
ART mechanisms
ART & ARF
Reasons for
ART
ART
mechanisms
Risk Transfer & Risk Financing
Traditional Insurance Market
Financial ReinsuranceART & ARF
Carriers Instruments
Self-insurance
Risk Retention Groups,Insurance Pooling
Captive Insurance Companies
Capital Markets
Multi-year, Multi-line,Multi-trigger Products
Finite Risk (Re-)Insurance
Securitization (ILS, Bonds, Insurance derivatives)
Weather derivatives
Contingent Capital
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
The Austrian Legal Background (I)
Insurance Market Regulations
– EU-Directives Solvency I+II:solvency margins, capitalisation, capital structure, etc.
– EU-Directives on European Reinsurance and Insurance Broking:capitalisation of captives, regulation of fronting, etc.
– International Financial Reporting Standards:differences particularly regarding the accounting treatment of financial instruments, etc.
ART & ARF
Reasons for
ART
ART
mechanisms
Legal
Background
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
The Austrian Legal Background (II)
Taxation and Accounting Issues
– Insurance Tax (§1 VersStG)captives, RRGs
– Corporate Income Tax (§ 26 BAO, § 18/1 Z 2 EStG)financial and insurance derivatives, deductibility of insurance premiums (captives, finite risk reinsurance) US-IRS statements
– Capital Gains Tax (KESt)derivatives, weather derivatives, cat bonds, finite risk (re-)insurance, contingent capital, captives
– Regulations concerning accounting practices (öHGB, IFRS) e.g. capital reserves and provisionsall ART instruments
ART & ARF
Reasons for
ART
ART
mechanisms
Legal
Background
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Insurance Market Surveillance (e.g. VAG)
– Requirements for the establishment of insurance companies in Austria (e.g. capital stock) captives, RRGs, pooling arrangements
– General insurance terms and conditions (AVB)finite risk (re-)insurance, insurance derivatives, captives, etc.
– Insurance contract law (VVG)finite risk (re-)insurance, insurance derivatives, captives, etc.
The Austrian Legal Background (III)
ART & ARF
Reasons for
ART
ART
mechanisms
Legal
Background
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Additional Legal Issues
– Public funds and support in case of catastrophes (KatFondsgesetz 1996, Tir KatHilfsdienstgesetz)
– Regional planning, hazard zone planning (GZP-VO, TROG, ForstG, TBO)
– Proposal for a Directive of the European Parliament and the Council on the assessment and the management of floods 2006 HORA: information system regarding property risk profiles, generalized basis for insurance pricing in Austria,already established as part of the future implementation of the mentioned Directive
The Austrian Legal Background (IV)
ART & ARF
Reasons for
ART
ART
mechanisms
Legal
Background
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
• Premium deductibility to be clarified by (inter)national jurisdiction
• Additional provisions for insurance and capital market surveillance on national, European and international level
• Harmonisation of market regulations in order to increase transparency and enhance fair pricing on insurance and capital markets e.g. capitalisation, solvency margins, reporting requirements and standards
Critical Issues – ART implementation
ART & ARF
Reasons for
ART
ART
mechanisms
Legal
Background
Implementation
Issues
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
Critical Issues – ART implementation
• Public-Private Partnership for more efficient risk sharing and risk reduction
• Assessment of critical market volumes and target groups in Austria, in particular concerning captive formation and individualised contracts as e.g. weather derivatives
• Creation of a risk reducing culture including improved risk perception – improving individual risk responsibility
ART & ARF
Reasons for
ART
ART
mechanisms
Legal
Background
Implementation
Issues
SRA-E 2006 Conference - Innovation and Technical Progress: Benefit without risk? 11-13 September Ljubljana
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