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 Gruber o.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
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Mag. Monika Gruber o.Univ.-Prof. Dr. Matthias Bank Department of Banking and Finance,
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 Presentation
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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:
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
– 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