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DISASTERS; INSURANCE;

OLR Research Report


February 4, 2009

 

2009-R-0010

INSURANCE AND FINANCIAL ASSISTANCE FOR NATURAL CATASTROPHES IN THE UNITED STATES AND OTHER COUNTRIES

By: Janet L. Kaminski Leduc, Senior Legislative Attorney

You asked for a summary of programs in other states and countries that provide insurance or other financial assistance to people whose properties sustain damage as a result of a natural catastrophe.

SUMMARY

With respect to natural catastrophes, a typical U.S. homeowners insurance policy may cover damage from fire, windstorms, and hail (among other perils). Flood and earthquake damage are excluded under homeowners insurance but covered under the comprehensive coverage portion of automobile insurance. Flood insurance is available through the federal government's National Flood Insurance Program. Earthquake coverage is available (1) as a policy endorsement or a separate policy and (2) from private insurance companies.

At least nine U.S. states— Alabama, California, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Texas—have natural catastrophe programs to provide insurance or other financial assistance. Generally, these programs are available to people and businesses who are unable to obtain insurance from the voluntary market, often because they are located in high risk areas (e.g. coastline, earthquake zone).

Other countries' approaches to natural disaster risks range from mandatory insurance with government-backed financial guarantees to using the voluntary marketplace. At least seven countries—France, Japan, New Zealand, Spain, Switzerland, Taiwan, and Turkey—have developed national programs for natural catastrophes. Germany, Italy, and the United Kingdom do not offer national programs, relying instead on the private market.

As of 2004, at least six—France, Germany, Italy, Spain, Switzerland, and the United Kingdom—allow insurers to establish special tax-deductible reserves to cover costs associated with potential catastrophes.

To respond to your request, we draw on information from the following U.S. Government Accountability Office (GAO) reports: (1) U.S. and European Approaches to Insure Natural Catastrophe and Terrorism Risks (GAO-05-199) and (2) Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance (GAO-08-7).

We also rely on the following Insurance Information Institute (III) reports from December 2008: Catastrophes: Insurance Issues (http://www.iii.org/media/hottopics/insurance/catastrophes/) and Earthquakes: Risk and Insurance Issues (http://www.iii.org/media/hottopics/insurance/earthquake/).

OTHER STATES

Alabama Insurance Underwriting Association

The insurance industry, in cooperation with the Alabama Department of Insurance, voluntarily formed the Alabama Insurance Underwriting Association (AIUA), also known as the “beach pool,” in the early 1970's. The AIUA provides residential and commercial coverage in coastal areas of Baldwin and Mobile counties. Every licensed property insurer in the state is an AIUA member.

AIUA issues two types of basic policies: (1) fire and extended coverage and (2) wind and hail coverage. Policy rates are generally higher than the average rates offered in the private market for a policy providing broad coverage options. Independent actuaries establish actuarially-sound rates to cover operating expenses, routine claims, and the cost of purchasing reinsurance.  The AIUA files these rates with the Alabama Department of Insurance for approval before they are used.

Most insurance companies, including the AIUA, offer higher deductible options that may reduce annual premiums substantially. According to the AIUA's website, it and many insurance companies now offer, or will soon offer, significant premium discounts to property owners who build new homes to “fortified” standards or install loss mitigation features, such as hurricane shingles; roof straps; and impact resistant doors, windows, and shudders.

A private market insurer's participation in the AIUA is determined by the percentage of market share the company writes in coastal areas of Baldwin and Mobile compared to the percentage of market share that it writes in the entire state. An insurer that voluntarily writes its share (or more) in the coastal areas (as compared to their state-wide market share) will generally have a smaller percentage, or no share, of participation in the AIUA.

AIUA is authorized to assess member insurers. The assessment is based on a member's proportion of net direct premiums of property insurance in the state. Members can receive annual credit against the assessment for voluntarily writing property insurance policies in the coastal area. Members are prohibited from passing the assessment onto to policyholders.

For more about AIUA, see http://www.alabamabeachpool.org/.

California Earthquake Authority

In 1996, the California Legislature established the California Earthquake Authority (CEA) as a publicly managed, largely privately funded entity. Companies that sell residential property insurance in California can offer their own privately funded earthquake insurance product or become a CEA participating insurer.

The CEA is managed by a governing board that consists of California's governor, state treasurer, and insurance commissioner.  The Assembly speaker and the Senate Rules Committee chairperson are nonvoting Board members.  All members, voting and nonvoting, may name designees to serve in their place.

An 11-member advisory panel advises the governing board on matters such as basic insurance-coverage issues, CEA's insurance rates, CEA's long-term sustainability and survivability, and the availability and affordability of earthquake coverage. Advisory panel members are appointed for four-year terms by the governor (six members), insurance commissioner (three members), Assembly speaker (one member), and Senate Rules Committee chairperson (one member).  Members represent property insurers, insurance agents, and the public.  The insurance commissioner is an ex officio, non-voting member.

California law requires insurers that sell residential property insurance in California to offer earthquake coverage to policyholders.  Residential property insurance includes coverage for homeowners, condominium owners, mobile home owners, and renters.  In offering earthquake coverage, insurance companies can become a CEA participating insurer and offer the CEA's residential earthquake policies or they can manage the risk themselves.  To date, companies that sell more than two-thirds of California's residential property insurance have become CEA participating companies.

CEA offers a variety of policy options, including a “minipolicy” that is a reduced-coverage, catastrophic earthquake insurance policy intended to cover a dwelling only while excluding nonessential items, such as swimming pools, patios, and detached structures.

CEA is funded from policyholder premiums, assessments on participating insurers, returns on investments, borrowed funds, and reinsurance. By law, CEA cannot spend more than 3% of annual written premiums on operating expenses.

For more, see http://www.earthquakeauthority.com/CEAIndex.aspx.

Florida

Citizens Property Insurance Corporation. In May 2002, Florida's governor signed legislation creating Citizens Property Insurance Corporation (Citizens) by merging the Florida Residential Property and Casualty Joint Underwriting Association, which was established in 1992 to provide homeowners property coverage statewide, and the Florida Windstorm Underwriting Association, which was created by law in 1970 to provide high-risk, wind-only coverage in designated coastal areas.

Citizens is a not-for-profit, tax-exempt corporation, whose public purpose is to provide people and businesses with affordable property insurance protection. Citizens' eight-member governing board includes two appointees of each of the governor, state's chief financial officer, House speaker, and Senate president. At least one of the two members each officer appoints must have demonstrated expertise in insurance.

Citizens offers (1) standard comprehensive multi-peril policies; (2) basic policies that are more limited than the standard policy; (3) commercial lines policies that are generally similar to policies available in the voluntary market; and (4) in selected areas of the state, wind-only policies. In general, an applicant is eligible for coverage from Citizens if the person or business is (1) not able to obtain coverage in the voluntary market or (2) offered coverage in the voluntary market, but at a premium that is more than 15% percent greater than the premium for comparable coverage from Citizens.

Before May 2006, rates were required to be noncompetitive with the voluntary market, meaning Citizens' rates were higher than those other companies quoted. In May 2006, legislation passed that required Citizens' rates to be high enough to allow Citizens to afford to purchase reinsurance. Since January 1, 2007, the law changed again and now requires Citizens' rates to be actuarially sound and not excessive, inadequate, or unfairly discriminatory, which is similar to the voluntary market. Citizens may also charge a separate surcharge toward the cost of reinsurance.

To fund deficits, the law authorizes Citizens to assess (1) insurers in proportion to their property and casualty premiums written in the state, (2) its own policyholders, and (3) surplus lines policyholders. Insurers may recoup the assessment from their policyholders. As private insurers limited their exposure in Florida due to increasing catastrophic risks, Citizens experienced an explosion of growth. It became the largest insurer in Florida in July 2006. In 2005, Citizens ran a deficit of $1.7 billion which was financed through premium surcharges and a cash infusion from the state.

Florida regulators are attempting to depopulate Citizens by having “take-out” insurers offer coverage to certain of Citizens' policyholders, primarily in the area west of I-95, which are considered to be outside the highest-risk areas of the state. The take-out insurers are permitted to offer rates that are comparable or lower than Citizens' rates. Citizens is authorized to pay a bonus to insurers that take out of Citizens 25,000 or more policies or a total insured value of at least $5 billion. In 2009, Citizens is adding underwriting exclusions to limit eligibility to properties deemed insurable (e.g., those that present a similar risk as other properties in the area) and lower its overall risk exposure.

For more about Citizens, see https://www.citizensfla.com/.

Florida Hurricane Catastrophe Fund. The state legislature created the Florida Hurricane Catastrophe Fund (FHCF) in November 1993 during a special legislative session after Hurricane Andrew as a way to encourage a stable insurance market. FHCF is a state administered reinsurance program that is mandatory for property insurers writing residential property insurance policies that provide wind or hurricane coverage in the state, including Citizens, with limited exceptions.

FHCF is structured as a tax-exempt state trust fund under the direction and control of the Florida's State Board of Administration (SBA), a constitutional state entity. It is governed by a board of trustees composed of the governor, chief financial officer, and attorney general. SBA appoints a nine-member advisory council to provide information and advice to SBA concerning FHCF. The membership consists of three consumer representatives; one representative each of insurers, agents, and reinsurers; and three technical experts—a meteorologist, an engineer, and an actuary. A senior officer and eight professional staff manage FHCF's day-to-day operations.

FHCF collects premiums from and provides reimbursements to insurers for a portion of their catastrophic hurricane losses. The amount of premiums collected from an insurer depends on the coverage level the insurer purchases. The amount FHCF reimburses following an “event” is a specified portion (45%, 75%, or 90%) of qualifying losses that exceed a loss retention threshold (i.e., deductible). The vast majority of insurers have purchased the 90% coverage option and the average industry deductible in 2007 was $6.089 billion. The insured property value that FHCF reinsured in 2007 was about $2 trillion.

The FHCF faced a shortfall in resources to reimburse insurers following the 2005 hurricane season and issued $1.35 billion in revenue bonds in 2006. It also levied an emergency assessment of 1% for approximately six years on all policies issued or renewed after January 1, 2007 to finance the bonds. Since the FHCF's cash balance for paying claims had been exhausted, the FHCF issued pre-hurricane liquidity financings in 2006 and 2007 of $2.8 billion in July 2006 and $3.5 billion in October 2007 to create liquidity for paying future claims.

For more information, see http://www.sbafla.com/fhcf/.

Georgia Underwriting Association

Insurance companies licensed to write property insurance in Georgia created the Georgia Underwriting Association (GUA) to make property insurance more readily available to all eligible applicants. The GUA administers the Georgia Fair Access to Insurance Requirements Plan (FAIR Plan).

The GUA insures homeowners in the state who have not been able to find property insurance in the voluntary market and provides coverage for windstorm and hail damage in coastal counties and off-shore islands. Structures in the wind and hail coverage area that are less than 10 years old must be built in compliance with the “southern standard building code” or its equivalent to be eligible for GUA coverage.

The GUA files its premium rates with the state insurance department for approval. It maintains reinsurance. It is also authorized to assess member insurers for operating losses in proportion to each insurer's property insurance premiums written in the most recent calendar year. Insurers are prohibited from passing assessments onto policyholders.

More GUA information is at http://www.georgiaunderwriting.com/.

Louisiana Citizens Property Insurance Corporation

The Louisiana Citizens Property Insurance Corporation (“Louisiana Citizens”) is a nonprofit, tax-exempt entity that provides property insurance for residential and commercial applicants who are not able to buy insurance through the voluntary insurance market. It is permitted to purchase reinsurance.

A 15-member governing board supervises Louisiana Citizens' operations. Members include the insurance commissioner; the state treasurer; the House and Senate chairs of the Insurance Committee; two insurance commissioner appointees, and nine governor appointees. The law restricts the appointments to specific areas of representation.

Louisiana Citizens administers the state's coastal plan in coastal areas of the state and FAIR plan in the rest of the state. It offers a variety of policies, including fire, vandalism, windstorm and hail, and homeowners insurance.

As a residual market, the plans are not intended to offer rates competitive with the voluntary market. Rates are generally at least 10% higher than average rates in the marketplace. All rates, rating plans, and rules are filed with the Department of Insurance for approval.

Each property insurer doing business in Louisiana is a member of Louisiana Citizens for the purpose of assessments. An insurer is assessed in proportion to its net direct premium written in the state during the preceding calendar year. Insurers are permitted to recoup assessments from their policyholders in the voluntary market in the form of a surcharge on each policy issued.

The Louisiana Legislature created a Matching Surplus Program in 2007 to “depopulate” Louisiana Citizens. Under the program, new or existing private insurance companies are encouraged to assume policies currently covered by Louisiana Citizens. The expectation is that this will prevent or reduce assessments on insurers and their policyholders.

For more about Louisiana Citizens, see http://www.lacitizens.com/.

Mississippi Windstorm Underwriting Association

The state legislature created the Mississippi Windstorm Underwriting Association (MWUA) in 1987. It provides windstorm and hail insurance to people and businesses in the coastal area of Mississippi who are not able to buy it in the voluntary market.

Specialized staff of the Mississippi State Rating Bureau operates and manages the MWUA and a board of directors oversees its activities. The 11-member board consists of five insurance company representatives, three insurance agency representatives (two from the coastal area and one non-coastal), two coastal business representatives, and the state treasurer. All MWUA rules and regulations are subject to the insurance commissioner's review.

If a structure was built after June 1, 1987, it must conform to the state's standard building code, including wind design requirements, to be eligible for coverage under the MWUA.

The MWUA's premium rates are subject to the insurance commissioner's approval. In recent years, the board sought to increase rates significantly to afford adequate reinsurance. The commissioner approved a fraction of the increase requested. In 2007, to help defray the cost of reinsurance, the state legislature (1) granted the MWUA authority

to issue bonds and other debt instruments and (2) created the Mississippi Windstorm Underwriting Association Reinsurance Assistance Fund. The fund is financed using state money that the insurance department may use only upon the legislature's appropriation.

Before the passage of HB 1500 on March 22, 2007, the MWUA consisted of every insurance company authorized to sell and actually selling property insurance in Mississippi. These member companies shared in the costs of the Association on a percentage basis equal to the company's annual percentage of the property market. Effective March 22, 2007, the MWUA no longer has member companies; instead, the former members are now “assessable insurers.”

Every insurer authorized to write and engaged in writing property insurance on a direct admitted basis in Mississippi is an assessable insurer. Any licensed insurer first authorized to write insurance after March 22, 2007 becomes an assessable insurer on the first day of January immediately following such authorization. An insurer's assessment is based on its amount of premium written in the prior year. Assessments are reimbursed to the insurers through a surcharge the insurance commissioner implements on all property and casualty insurance policies in the state.

For more about the MWUA, see http://www.msplans.com/mwua/.

North Carolina Insurance Underwriting Association

The North Carolina Insurance Underwriting Association (NCIUA), also known as the “beach plan,” makes insurance coverage available to people and businesses that are not able to buy it through the voluntary insurance markets. It was created in 1969 to cover only the barrier islands adjacent to the Atlantic Ocean. In 1998, the legislature expanded it to include the 18 coastal counties (“the coastal area”) for windstorm and hail only coverage. Effective July 1, 2003, the legislature authorized the NCIUA to offer homeowners insurance policies for principle residences in the 18 coastal counties.

The NCIUA provides basic coverage, including most major perils. And broad coverage, which includes a broader array of covered perils. To be eligible for coverage, any property built after January 1, 1970 must be constructed in compliance with North Carolina building codes.  The NCIUA's operation is subject to review by the North Carolina insurance commissioner.

A 14-member board of directors, consisting of seven insurance industry representatives, four licensed agents and three members of the general public, serve as the NCIUA's policymaking body.  A staff of professional insurance people, independent of any single insurance company, manages the plan.

All property and casualty insurance companies that do business in North Carolina share in the NCIUA's expenses, profits, and losses in proportion to their property insurance net direct premium written in the state. Insurers receive credit against their portion of funding for property insurance voluntarily written in the coastal areas.

For more about NCIUA, see http://www.ncjua-nciua.org/html/about-nciua.htm.

South Carolina Wind and Hail Underwriting Association

The South Carolina Wind and Hail Underwriting Association (SCWHUA), also called the “beach plan” or “wind pool,” is the residual property insurance market in South Carolina authorized by law in 1971. It makes coverage for wind and hail perils available to people and businesses in the state's coastal area who are not able to buy it through the voluntary insurance market. The coverage territory is specifically defined by law.

The SCWHUA offers a limited peril policy covering losses from wind and hail damage. To be eligible for coverage, the property must be in compliance with the southern building code and the federal flood construction and zoning guidelines.

A board of directors oversees the SCWHUA. The board consists of 11 insurance company representatives, two coastal insurance agents, and four consumer representatives. A staff of professional insurance individuals independent of any single insurance company manages the plan.

The SCWHUA must file premium rates with the state insurance director for approval. Premium rate increases or decreases up to 7% may be used upon filing them with the director. Increases or decreases of more than 7% cannot be used until the director approves them.

All property and casualty insurance companies doing business in the state must participate in funding the plan. The SCWHUA is authorized to assess member insurers, who may pass the assessments onto policyholders in future rate filings. As of June 2007, the SCWHUA is also authorized to sell bonds and incur debt.

For more about the SCWHUA, see http://www.scwind.com/.

Texas Windstorm Insurance Association

The state legislature created the Texas Windstorm Insurance Association (TWIA), also called the “windpool,” in 1971. TWIA offers windstorm and hail coverage for people and businesses in 14 coastal counties and parts of Harris County (excluding Houston) that are not able to buy it in the voluntary insurance market. TWIA's goal is to depopulate its business (i.e., transfer policies to the voluntary market), but in the meanwhile, to make insurance coverage available as a last resort in the coastal areas.

A nine member board of directors governs TWIA, including representatives of insurance companies (five), agents (two), and consumers (two).

The board files premium rates with the state insurance commissioner for approval. Approved rates must be uniform throughout the coastal areas. By law, TWIA's rates for residential policies cannot increase by more than 10% above the rate in effect at the time the board files the new proposed rates. However, the commissioner may suspend this rule after a catastrophe to ensure rate adequacy in the affected area.

By law, all property and casualty insurance companies authorized to write coverage in Texas are members of TWIA. An insurer's percentage of participation is based on its statewide sales versus sales within TWIA's territory. The board assesses members for the first $100 million in losses according to the companies' participation level. Any pool profits are deposited to the legislatively-created Catastrophe Reserve Trust Fund, which may be used to cover any excess losses. The TWIA also purchases reinsurance to defray losses. Additional member assessments may be levied if necessary.

To be eligible for TWIA coverage, additions and alterations to existing property and all new construction must meet applicable state building codes. For property built before the current buildings codes were enacted, owners may be eligible for a rate reduction if they install modifications to meet the plan's windborne debris impact-resisting standards.

More information about the TWIA is at http://www.twia.org/.

OTHER COUNTRIES

Germany, Italy, and the United Kingdom

Germany, Italy, and the United Kingdom do not offer national insurance programs for natural catastrophes (i.e., they do not mandate insurance coverage or offer a federal back stop for losses).

In Germany and Italy, insurance for natural catastrophes is available from private insurers as an optional coverage to a standard property insurance policy for an additional premium. In the United Kingdom, insurance for floods is generally included in private insurers' standard property insurance policies.

France

The French government created the Catastrophes Naturelles program in 1982 to pay for “uninsurable” disasters. It covers uninsurable events of abnormal intensity, including floods, mud slides, landslides, drought, earthquakes, tidal waves, and avalanches.

Catastrophe insurance is compulsory (i.e., required) in France. According to the GAO, the French government estimates that 95% to 98% of the population has bought coverage. Premiums are uniform throughout the country.

To cover the risk associated with natural catastrophes, insurers collect a premium surcharge from non-life (e.g., home, auto, commercial) insurance policyholders in an amount the government determines (12% in 2005). An insurer may retain the risk of natural catastrophes and use the surcharges collected to cover any losses incurred. Or an insurer may use the surcharges to purchase reinsurance from either a private reinsurer or the government-owned company, Caisse Central de Reassurance (CCR).

CCR offers unlimited reinsurance coverage that the French government guarantees for insurers that cede at least half of their catastrophe risk to CCR. For those insurers, if CCR exhausts its resources, the government covers any additional losses. Insurers pay a portion of the catastrophe losses as a deductible before the reinsurance takes effect.

To trigger CCR's reinsurance payouts and the government guarantee, the government must declare that an event qualifies as a natural disaster. The GAO noted that from 1982 to 2005, the French government declared 110,000 natural disasters and paid out 6.4 billion Euros (about $8.6 billion in December 2004), more than half of which was for floods.

Japan

According to the National Association of Insurance Commissioners, Japan's government made a public policy decision to make earthquake damage insurance widely available following the 1964 Niigata earthquake. Today, Japan has a public-private partnership for earthquake insurance. The partnership is between the Japanese property insurers, who offer the policies, and the Japanese government, which provides reinsurance.

In 1966, the government created the Japan Earthquake Reinsurance Company, Ltd. (JER). Private insurers enter into reinsurance treaties with JER, which reinsures only earthquake insurance. JER, in turn, has entered into a reinsurance treaty with the government, which provides a backstop once earthquakes losses exceed a specified amount. A limit is set annually on the amount payable by insurers, JER, and the government. If the claims exceed that amount, claim payments are prorated to stay under the cap.

Japan has revised its earthquake insurance program numerous times, typically following major earthquakes. For example, in 1980, the government began requiring insurers to offer optional earthquake coverage to policyholders. In 1995, following the Hyogoken-Nanbu earthquake, which resulted in claims totaling over 70 billion yen (approximately $700 million in 1995), Japan introduced incentives to encourage construction of earthquake-resistant structures.

Premium rates for earthquake insurance are based on the geographic region in which the property is located, the structure's construction, and an earthquake resistance indication grade under Japan's Housing Quality Guarantee Law. Further discounts of 10%, 20%, or 30% are available based on the structure's earthquake resistance classification (i.e., if the structure can withstand the seismic force identified in Japan's building standards law, 1.25 times that force, or 1.5 time that force). Japan's Non-Life Insurance Rating Organization sets the earthquake insurance rates, not the competitive market.

More information about earthquake insurance in Japan is available at http://www.nliro.or.jp/english/earthquake.html.

New Zealand

New Zealand enacted the Earthquake and War Damage Commission in 1944 to cover “uninsurable” risks, including earthquakes, for people who bought fire insurance policies. In 1994, the government expanded the program, now the Earthquake Commission, to cover other natural catastrophes. The program no longer covers war damage.

The insurance available from the commission, called EQCover, insures homes, personal belongings (with some exceptions), and the land the homes are on. It insures against earthquake, natural landslip, volcanic eruption, hydrothermal activity, and tsunami; in the case of residential land, a storm or flood; and fire caused by any of these. EQCover applies only to residential homes that are insured against fire. A tax levied on fire policies funds the program.

Having collected premiums for over 60 years, there is currently about $5.4 billion in the commission's fund. The fund is also backed up by reinsurance and a government guarantee.

More information is available at http://www.eqc.govt.nz/.

Spain

In 1954, the Spanish government established Consorcio de Compensacion de Seguros (CCS) to indemnify victims of the Spanish Civil War. Today it provides insurance coverage for natural catastrophe risks not covered by standard insurance policies and acts as a guarantee fund for when an insurer cannot fulfill its obligations (e.g., the insurer covered the natural catastrophe but subsequently filed for bankruptcy or became insolvent). CCS provides coverage for earthquakes, tsunamis, floods, volcanic eruptions, atypical cyclonic storms, and meteorites.

Although it is government owned, CCS operates as a private company and complies with the laws and regulations applicable to private entities. It is funded by policyholder surcharges that are based on the type of property insured (e.g., home, office, industrial site, public works). Insurers are required to include natural catastrophe coverage in standard property insurance policies, collect the surcharge from policyholders, and transfer the surcharges collected to CCS. In return, the insurers receive a tax-deductible 5% commission.

Policy terms dictate when an event is triggered (not a government declaration of disaster, like in France). The Spanish government provides an unlimited guarantee in the event that CCS exhausts its resources. According to the GAO, the government guarantee has never been triggered.

Switzerland

Swiss insurers voluntarily created pools, such as the Elementarschadenpool (Swiss Elemental Pool), in 1953 to pool natural catastrophe risks, making coverage more affordable and allowing insurers to share in claim costs. In 1992, the Swiss government made natural catastrophe insurance mandatory and imposed building restrictions in avalanche and flood zones.

The mandatory coverage provides insurance for high waters, floods, windstorms, hail, avalanches, snow pressure, falling rocks, and landslides. All policyholders pay a uniform premium rate for the mandatory coverage. Insurers also offer optional earthquake coverage for an additional charge.

There is no government backstop for extraordinary losses, but the insurer pools and specialized reinsurance companies help spread the risk of damage from natural catastrophes.

Taiwan

Following a 1999 earthquake that resulted in more than $9 billion in economic losses, the Taiwan's Ministry of Finance created the Taiwan Residential Earthquake Insurance Program (TREIP) as part of a comprehensive disaster prevention and risk management program. TREIP and an associated fund became operational in April 2002. All property and casualty insurance companies underwriting fire policies in Taiwan must to issue residential earthquake insurance policies.

Under the program, insurers, reinsurers, and the government share in claim costs for earthquake damage in a three-tier scheme. Insurers cover losses up to a specified amount (the first tier), a government-established fund pays additional losses up to another specified amount and the reinsurance industry covers a portion of that (the second tier), and the government pays losses beyond that amount up to a fixed amount (the third tier). If total losses exceed the cap, policyholder claims are prorated to stay under the cap.

The program covers only residential property and homeowners pay a uniform, flat fee premium. The perils covered are fire, explosion, landslide, land subsidence, land movement, land rupture, tidal wave, surge, and flood caused by an earthquake. The policy covers the home, contents, and contingent living expenses up to specified amounts.

For more information, see http://www.treif.org.tw/treif/index.asp.

Turkey

Following a 1999 earthquake, the Turkish government established a compulsory earthquake insurance scheme administered by the Turkish Catastrophe Insurance Pool (TCIP). The law requires owners of certain private residences to have earthquake insurance. For these pool participants, earthquake coverage is provided up to a fixed limit for all registered properties, excluding rural areas and unauthorized construction. Insurers may sell optional coverage above the mandatory limit and to those not required to purchase it. Insurers may purchase reinsurance from private reinsurers.

The TCIP was meant to replace a government obligation to finance housing reconstruction after earthquakes. Premiums vary based on a risk assessment. As conceived, TCIP was to be the sole source of funding for earthquake losses. However, following 50 earthquakes between 2000 and 2003, the government waived the requirements of the disaster law and declared all citizens eligible for government funding, whether or not they were insured. For the three year period, TCIP paid out $7 million to 4,200 policyholders. Under the government waiver, the Treasury paid an additional $200 million. (Source: Paul K. Freeman, University of Denver, November 2004, Government Natural Catastrophe Insurance Programs, available at http://www.oecd.org/dataoecd/15/29/33913424.pdf.)

JKL:ts