The Italian government has lost its ability to act at the “insurer of last resort” for earthquake coverage under the weight of the ongoing Euro financial crisis, leaving the private markets to step in and devise coverage, according to a report issued by Swiss Re on Monday.
According to the report titled The Italian Insurance Market: Opportunities in the Land of Renaissance, the Italian state will no longer act as the primary source of post disaster financing creating a “protection gap” that private insurers and reinsurers will need to fill.
“The Italian government will need to find new solutions to the widening protection gap. The recent earthquake in Emila Romagna provided a stark reminder that Italy is highly exposed to damaging earthquakes and floods,” the report states. “All such changes call for greater involvement of the private sector.”
Tens-of-thousands of northern Italian residents and their properties were hit with a magnitude 5.8 earthquake in the Emilia-Romagna region of Italy on May 20, causing an estimated $100 million on damage.
Italy is the most earthquake prone country in the European union, yet it it the least equipped to deal with the financial fallout fallowing a natural disaster, according to the report.
The country has documented at least 400 damaging earthquakes in the last 2000 years, and 64% of the current population lives in area with buildings not equipped to handle a significant seismic event. At the same time only 0.4% of the existing property policies carry additional earthquake cover and Italy’s 120% debt-to-GDP ratio has crippled the state’s ability to finance reconstruction or retrofitting, Swiss Re says.
The report cites the L’Aquila region — which was struck by an earthquake in 2009 — as an example of the country’s troubled catastrophe financing straits. The medieval center of the L’Aquila remains in reconstruction three years after the disaster when funding was slowed by budgetary constraints, despite the government’s promise that “100% payment” for reconstructions efforts.
“The misguided belief that the state will provide as an insurer of last resort is well illustrated in the case of L’Auqiala,” Swiss Re says.
Swiss Re suggests that attempt to change the catastrophe financing environment in Italy has stalled, with compulsory earthquake insurance part of a “decade long debate” that has year to bear fruit and entice the private market.
“In the absence of a mandatory scheme, this will only happen if there is a rise in natural disaster awareness and/or the government creates the financial incentives for voluntary cover. A private solution will therefore have to be accompanied by public campaigns to raise awareness about natural disasters,” the report states.
