Austrian Insurers Need Better Risk Assessment Says S&P

October 11, 2005

Despite the fact that the Austrian insurance industry came off “relatively lightly from the recent summer floods,” Standard & Poor’s Ratings Services said it “believes the event reinforces the need for insurers to further enhance measures to better assess the risk of natural catastrophes and to price policies on a risk-adjusted basis.”

S&P said: “Ramifications arising from the floods over one month ago have been assessed as relatively limited by the insurance industry, with insured losses put at up to 100 million euros [$120 million]. This compares with an approximate 400 million euro [$481.5 million] insured loss as a result of the floods back in 2002. Extensive reinsurance protection significantly mitigates insurers’ exposure. Furthermore, strong performance over the past twelve months and a continued sound earnings outlook for 2005 is expected to comfortably offset the net impact of the floods for the larger and more diversified Austrian insurance players.

“However, some of the smaller regional players concentrating on the areas most affected, namely Tyrol, Vorarlberg, and Styria, might be disproportionately hit, and may well face the additional burden of increased reinsurance costs in future years. Although the industry has escaped relatively unscathed from the recent flood losses, recent events have triggered a comprehensive discussion on catastrophe protection, which should result in the industry-wide introduction of a more detailed analytical risk assessment tool for floods and for other potential natural catastrophes.”

S&P said it “believes that such a development should support Austrian insurers’ risk-adjusted pricing, ultimately resulting in lower earnings volatility. As a result of this development, costs for insurance cover in more exposed regions may differ substantially from other parts of the country or may not even be privately insurable at all in future. Against this backdrop, the industry, together with the Austrian federal and state governments, is expected to reconsider ways to limit insurers’ maximum exposure from single events, for example through a country-wide partnership on the diversity of catastrophic risks combined with a governmental guarantee. Standard & Poor’s expects such cooperation would increase the insurance sector’s stability, insulating it from substantial peak risk due to natural catastrophes.”

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