The apocalyptic earthquake in Turkey and Syria has rekindled attention to catastrophic risk in the countries most exposed to natural events. Whether we are seismic or volcanological, the underlying fear is to end up with a destructive scenario that our country has known many times. From Irpinia to Friuli, passing through Emilia-Romagna, Abruzzo and the Marches, the dramatic events were varied. And this is why Ernst & Young (EY) has a noteworthy proposal to mitigate risks through a “Cat pool”, an insurance and reinsurance consortium company owned by all companies on the market operating in the sectors concerned. A proposal that could be funded by a collaboration between the public and private sectors, but also through the National Recovery and Resilience Plan (Pnrr). And that could mitigate Italy’s financial exposure to disasters.
The multiple seismic event that hit the Anatolian fault between Syria and Turkey destroyed lives and buildings, but as the geologist and science communicator Mario Tozzi recalled in the pages of this masthead, it also focused attention on the quality of disaster prevention natural. The context in which our country moves, as explained by an EY report edited by Marco Podestà, is complicated. «Italy is one of the most vulnerable nations in the world from a hydrogeological and seismic point of view. The Global Climate Risk Index 2021 published by Germanwatch, a German NGO specialized in monitoring climate risks, indicates Italy as the sixth country in the world for the number of deaths and economic costs deriving from extreme climatic events in the last twenty years. . According to the Titan study (Territorial Impacts of Natural Disasters) of the European program Espon, specialized in regional policies, Italy, with Greece, Romania and Bulgaria, is “the country with the majority of the population residing in very vulnerable territories, following from Spain, Portugal, Hungary, Poland and France». Not only that: the ISPRA 2021 Report (Higher Institute for Environmental Protection and Research) on hydrogeological instability notes that overall 93.9% of Italian Municipalities (7,423) are at risk from landslides, floods and/or coastal erosion. As if that weren’t enough, explains the report, “ours is one of the countries with the greatest seismic risk in the world, being in the convergence area between the African and Eurasian plates and given the high population density in the area”. The earthquakes that hit the peninsula – more than 30,000 in 2,500 years – “caused enormous economic damage, quantified by Giovanni Legnini, former extraordinary government commissioner for post-earthquake reconstruction in 2016 in Central Italy, at 191 billion euros in the last 50 years”. Just think, underlines the study, “that the 2016 earthquake in Central Italy alone cost 27 billion euros”. To these amounts must be added “both the further indirect damages, due to the interruption of economic activities, and the significant repercussions on the historical, artistic and monumental heritage”.
This is the basic picture, sadly current again in the light of the seismic apocalypse in Anatolia. Hence Ernst & Young’s proposal to create an insurance pool to protect the country’s economic and financial activities. To date, according to the “2023 Global Insurance Outlook” report prepared by EY, our country has “one of the highest protection gaps in the world; in fact, 89% of losses due to natural catastrophes in Italy in the last ten years were not insured!. As evidence of this state of underinsurance, the study points out, “Ania, in the report «Trends in fires and natural catastrophes in homes», estimates that in 2022 only 50% of Italian homes are covered by policies against fire risk , and only 5.1% have an extension against events related to natural disasters, despite more than 75% of homes being exposed to a significant risk of natural disasters of various types”. The main reason, for EY, “lies in the fact that the state aid disbursed after the event is taken for granted by the population”. The consequence is that “the autonomous and responsible choice of insuring yourself with coverage against damage from natural catastrophes fails in the face of the expectation of a subsequent state intervention”. This presumption, it is underlined, “is moreover erroneous: often, in fact, the state contributions to compensate for the damages were partial, or related only to the direct damages (and not to the indirect ones, much more substantial), and extremely late”.
The possibility of giving birth to a financial instrument capable of mitigating catastrophic risks is no less a priority than many others, according to Marco Podestà, partner of EY. As explained in the report, «the transfer to the pool and the consequent construction of a diversified portfolio, i.e. made up of poorly correlated risks, optimizes the capital absorption of the vehicle, net of the individual retentions of the transferors. Indeed, the pool will not bear all of the insured risk and will transfer part of it to the international markets through the reinsurance mechanism or the issue of Cat bonds”. From a strategic point of view, it is explained, «this model makes it possible to transfer the management and burdens deriving from catastrophic risks from the State to the private market, with a series of benefits from the point of view of intervention effectiveness and efficiency in the use of resources”. The State contribution, explains EY, «in our proposal is limited to the definition, implementation and (in part) management of the model (for example through Cassa Depositi e Prestiti, which could assume the role of arranger of the consortium, or through SACE which could hypothetically hold a direct shareholding in the same vehicle). However, the benefits could be spread across the entire population.
For the Cat pool to work, at least initially, catastrophe insurance should be made mandatory, at least initially. And in this case, “to achieve the broadest consensus of the population with respect to this initiative and the necessary political practicability, it would be possible to finance the start-up phase of the Cat Pool through the funds of the Pnrr, transforming it into a total tax credit or the obligatory premium is partial”. The main advantage, according to the strategic consultancy firm, “lies in the transfer of risk from the state to the private sector”. Italian citizens, through taxation, have had to compensate for billions of euros over time for the damages caused by catastrophic events. «The instrument most used by the State to deal with past emergency situations, and therefore with the related financial duties, was that of excise duties» it is noted. “Our proposal, on the other hand, avoids possible increases in future excise duties and indeed would substantially reduce them over time and allows for further stabilization of the public debt, preventing sudden increases due to extreme natural events”, it is highlighted. If it is true that prevention is better than cure, then an insurance and reinsurance pool to mitigate the fragility of our planet is a possible solution capable of reducing Italy’s exposure. Which is one of the highest in the world.