PRAC the Romanian Catastrophe Insurance Scheme

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PRAC - the Romanian Catastrophe Insurance Scheme
Romania is troubled by several natural perils,
including earthquake, flood and landslides. To
provide cover against these to owners of
dwellings, the government is now setting up a
compulsory insurance scheme which should commence
operations in 2007. The scheme, called PRAC
after its Romanian initials (Programul Roman de
Asigurare la Catastrofe), is built on principles
similar to several other national catastrophe
insurance schemes, but with special features,
including an important role of the insurance
industry. Local authorities are strongly involved
in ensuring compliance.
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Earthquakes, Floods and Landslides Affect Romania

• The earthquakes, which cause nearly all the
  damage, are centred in one concentrated zone
  the Vrancea zone. Floods come both from the
  Danube river and from smaller rivers and streams.
  Landslides are a much less significant hazard
  but damaging locally.

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The Vrancea Earthquake Zone

• Quake risk in Romania is higher than in most
  European countries. The Vrancea earthquake zone,
  within which about 95 of the seismic energy is
  released, causes over 90 of the losses due to
  earthquakes.
• Vrancea lies in the mid-east of the country,
  about 140 km NNE of Bucharest.
• The earthquakes are at what seismologists
  describe as intermediate depth, with the larger
  events mostly from 75 to 160 km in depth.

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The Quake in 1977 Caused Damages Worth 2 Billion

• While over past centuries large earthquakes have
  occurred quite frequently, with nine in the past
  200 years with a magnitude (Mw) estimated at 7 or
  over, a lot are deep enough not to cause severe
  damage.
• The most recent major event was in 1977 and
  caused considerable damage to Bucharest,
  estimated by the World Bank to amount to USD 2
  billion at the time.

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Romanian Quake Risk Is Higher than in Most
European Countries
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River Basins Map of Romania
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Floods Come from South

• The Danube River has flooded when upstream
  countries are also affected, with major floods in
  2006.
• In addition high-intensity rainstorms cause
  flash floods in other smaller rivers or
  streams.
• Dam burst is another possible source of
  flooding, but is a very much less likely source
  of loss.

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Annual Floods Damage Is 18m Euro

• The largest losses in the past 25 years were
  reported at EUR 171 million for dwellings in
  2005, and an annual average loss over that period
  of time is estimated at about EUR 18 million.

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West Carpathian Mountains Are the Landslide Zone

• The areas of greatest landslide risk lie in the
  South Western part of the Carpathian Mountains,
  and the average annual loss has been estimated to
  be about 2 orders of magnitude less than that of
  flooding at about EUR 125,000.

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Hazard Risk Mitigation Project

• A World Bank project Hazard Risk Mitigation
  Emergency Preparedness GEF Project was approved
  by the Bank in 2004.
• This was a broad project with a range of
  components, and included funding for the planning
  and for a catastrophe insurance scheme.
• The Romanian government responded in 2005 with a
  proposed scheme, but agreement was not reached
  with the World Bank on the structure suggested at
  that time.

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Hazard Risk Mitigation Project

• A resident catastrophe insurance adviser was
  appointed in 2006 and consultancies contracted.
  The first project was titled an Integrated
  Disaster Risk Management Study and was executed
  by RMSI and the second - Development of
  Guidelines on Risk Management, Assets Allocation
  and Operation is being executed by the Willis
  Group.
• The work on the law to establish a scheme was
  commenced in mid 2006 and the approval, required
  by several ministries and other official bodies,
  was delayed somewhat by the effects of changes in
  the government in early 2007.

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Hazard Risk Mitigation Project

• A resident catastrophe insurance adviser was
  appointed in 2006 and consultancies contracted.
  An Integrated Disaster Risk Management Study was
  executed by RMSI another one - Development of
  Guidelines on Risk Management, Assets Allocation
  and Operation was done by the Willis Group.
• The work on the law to establish a scheme was
  commenced in mid 2006 and the approval, required
  by several ministries and other official bodies,
  was delayed by the changes in the government in
  early 2007.
• However the law was approved by the government
  for submission to parliament for emergency
  procedure consideration on 29 September 2007.

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Romanian Conditions

• Romania has a population of about 21 million and
  about
• 8 250 000 dwellings. The dwellings are of various
  types, as shown on the table.

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Present Stage of the PRAC Scheme

• The most significant step in building the scheme
  was the acceptance of the reinsurance brokers
  offer to assist in the preparations for
  reinsurance.
• A consortium of the four major firms in the world
  was appointed, led by AON, with Benfield as lead
  modeller, and also including Guy Carpenter and
  Willis.
• The assistance, provided by the consortium, was
  invaluable not only with planning and design of
  reinsurance but also with high level technical
  support in other areas.

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The Proposed Scheme PRAC

• The objective was to learn from the experience
  around the world. PRAC has been designed as a
  simple scheme and as low cost as possible.
• In summary
• The perils covered against are earthquake, flood
  and landslide
• Property covered is dwellings only, and all
  dwellings must be insured
• The scheme uses community rating
• Cover is on replacement basis up to limits which
  should rebuild a modest dwelling
• Insurers issue policies, and assess and settle
  claims

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The Proposed Scheme PRAC

• All risk is reinsured with the pool company PAID,
  and then to be transferred to world markets
• The entity operating the scheme (called PAID
  the Natural Disaster Insurance Pool) is to be a
  joint stock company owned by qualifying insurers
• Local government will assist with enforcing the
  compulsion to insure, with an incentive to do so
• The government will fund reinsurance premiums in
  early years, and act as lender of last resort in
  the event of overwhelming losses.
• The World Bank involvement in the project has
  comprised the funding of consultancies and
  high-level technical advice.

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The Pool

• The entity to manage the Pool will be a joint
  stock company (PAID), with participating insurers
  as shareholders. The Insurance Supervisory
  Commission will approve insurers as qualifying to
  participate. Each will be required to contribute
  a minimum amount of capital with none having more
  than 15, and there will need to be 5 at least
  for the scheme to start.
• PAID will be governed by a Board of Directors
  within which the only outside member will be from
  the Insurance Supervisory Commission.
• PAID will operate as a reinsurer and to some
  extent as an insurer as well.

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Conclusions

• The PRAC scheme is nearly ready to be born. While
  major logistical challenges lay ahead, the large
  amount of solid technical work done is an
  excellent foundation.
• The boldness of the government in seeking to move
  ahead rapidly will hopefully bring the benefits
  of the insurance coverage before the next major
  disaster hits Romania.

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• Thank you
• Radu Popescu,
• Advisor in the Ministry of the Internal Affairs
  and the Administrative Reform