The earthquake risk in the majority of Europe is relatively low compared to regions near tectonic plate boundaries such as the Pacific Ring of Fire. However, the risk is considered “high” particularly in the spine and southern parts of Italy, where there is a significant protection gap.
Earthquake insurance challenges for real estate investors/owners
High premium costs: Earthquake insurance premiums can be significantly higher compared to standard property insurance.
Limited coverage: Earthquake insurance often comes with limitations and exclusions. For example, policies may cover structural damage but not the contents of a building or losses related to business interruption. Additionally, there may be limits on coverage amounts, which may not fully cover the cost of rebuilding or repairing a property.
Deductibles: Earthquake insurance policies typically have high deductibles which means that the property owner must cover a significant portion of the damage costs before insurance kicks in.
Availability: In areas with lower seismic activity, insurance is generally more readily available. However, in regions with a history of earthquakes, it may be challenging to find insurers willing to provide earthquake coverage.
Complex underwriting process: Earthquake insurance underwriting can be complex, involve detailed assessments of a property's location, construction, and vulnerability to seismic activity.
Rising costs: The cost of earthquake insurance can increase over time, especially if there is an uptick in seismic activity or if insurers have paid out significant claims.
Risk mitigation requirements: Some insurers may require property owners to implement seismic retrofitting and other risk mitigation measures to qualify for coverage.
Market conditions: Insurance market conditions can impact the availability and cost of earthquake coverage. After a major earthquake event, insurers may become more cautious and raise rates.
The insurance protection gap in Italy
Italy has a considerable insurance protection gap regarding natural catastrophes (NatCats), with an estimated difference of over 4 billion euros (average value of non-insured damages annually reported). In case of an event, this means that the affected population is likely to depend on government support for reconstruction, which can be slow or unavailable.
According to the latest data collected by Italy’s National Insurance Association (ANIA), 75% of privately owned houses are exposed to significant NatCat risks. The level of risk exposure is not reflected in insurance coverage, though. 98% of total economic losses from earthquakes in Italy during the period of 1980-2021 were uninsured, according to the European Insurance and Occupational Pensions Authority (EIOPA) (opens a new window). Unlike most developed countries, Italy lacks an organic legislative system to deal with the economic impact of NatCats. After many public debates and some legislative proposals, the only intervention aimed at increasing NatCat insurance penetration was the introduction of the 19% deductibility of NatCat premium in 2018 and the exemption of taxes payable (currently equal to a rate of 22.25%).
Given the high hazard of the territory and the consequent need of capacity to cover the risk, a reasonable solution would be a combined participation of the state and the private insurance system. This should include the obligation to subscribe to earthquake and flood coverage at a minimum (risks already well known and studied), with the aim of reaching the necessary volume of premiums.
Reinsurance concerns
The next reinsurance renewal sees the Italian market faced with an extremely difficult test: if insurers are unable to attract adequate reinsurance, both in terms of capacity and cost, the market could be forced into significant and urgent transformation.
It is critical to remember that Italy has an additional structural weakness: the country does not have a domestic reinsurer, neither public nor private, which in difficult times could support the international market. Not obtaining the necessary capacity at a reasonable cost could cause serious damage to the domestic NatCat market:
High prices could suffocate albeit modest growth of the last 5-6 years or make the offer of this type of insurance product uneconomical for smaller companies.
A significant increase in demand - partly driven by the recent Emilia Romagna flood last summer - could result in lack of capacity.
Risk assessment and mitigation:
Property owners should conduct thorough assessments of the seismic risk associated with their specific locations. This involves understanding local geological conditions, historical earthquake data, and vulnerability of structures.
Risk mitigation: Implement earthquake risk mitigation measures such as seismic retrofitting for older buildings, adhere to modern building codes, and implement structural improvements. These actions can reduce the potential for damage and lower insurance premiums.
Insurance broker expertise: Work with experienced insurance brokers who specialize in earthquake insurance. They can help property owners navigate the complexities of the insurance market, find suitable coverage, and negotiate favorable terms.
Higher deductibles: Consider opting for policies with higher deductibles to lower premium costs.
Catastrophe bonds: Explore the possibility of catastrophe bonds, which are financial instruments that can provide coverage for earthquake losses. These bonds are typically issued by insurers or reinsurers.
Alternative risk management: Consider alternative risk management strategies such as self-insurance or captive insurance.
Education and awareness: Educate tenants, employees, and residents about earthquake risks and safety measures.
Financial resilience: Build financial resilience by setting aside a dedicated fund or contingency reserve for earthquake-related expenses.
For further information, please visit the Lockton Real Estate and Construction page (opens a new window), or contact:
Dan Topp, Account Handler GREAC
E. dan.topp@lockton.com
James Herring, Account Executive GREAC
E. james.herring@lockton.com