Natural Hazard Mitigation and Insurance
The United States and Selected Countries Have Similar Natural Hazard Mitigation Policies but Different Insurance Approaches Gao ID: GAO-09-188R December 22, 2008Natural hazards adversely affect hundreds of thousands of people worldwide each year and cause extensive property damage. In 2007, a year that was not considered an exceptional one for natural hazards, natural hazards caused an estimated 14,600 deaths and $70 billion in property losses. For that year, the insurance industry covered $23.3 billion in losses. In catastrophic loss years, such as 2005--the year that saw Hurricane Katrina--losses can be far greater. Scientific assessments indicate that climate change is expected to alter the frequency and severity of natural hazard events, and as a result, losses can be expected to climb. Given this scenario, examining policies that are used in other countries to reduce the loss of life and property caused by natural hazard events and examining insurance approaches that provide coverage for natural hazard losses can help identify practices in both areas that could benefit the United States. Similarly, given the ongoing challenges facing the United States, international cooperative efforts may provide instructive examples of risk management and disaster reduction. Because of Congressional interest in these areas, GAO was asked to (1) identify policies used by other countries to reduce losses caused by natural hazards; (2) examine the extent of international cooperation among selected countries, including the United States, to mitigate natural hazards; and (3) identify approaches that other industrialized countries use to insure natural hazard risk and regulate insurers.
The countries that we studied use a variety of policies to reduce losses from natural hazards that are similar to policies used in the United States. As we have previously reported, mitigation policies, assessing and mapping hazard risk, land use planning, building codes, and public awareness, can be used to reduce the risk of losses from natural hazards. The countries we studied also participate in a variety of international efforts to minimize natural hazard risk. We found that these efforts are consistent with key practices in collaboration that we identified in prior GAO work. The six countries we studied use a variety of approaches to insure natural hazard risk and regulate insurers. Generally, their approaches involve both the government and the private sector. In four countries with government insurance approaches, property insurance policies include natural hazard insurance coverage at a fixed premium, and three of these countries have a government guarantee. All six countries have some type of private insurance approach, and four of these countries offer optional coverage of various natural hazards and have risk-based premiums. Finally, five countries have a centralized (federal-level) agency to regulate the private insurance industry. Three of these government agencies regulate the entire financial services industry--for example, the Australian Prudential Regulation Authority oversees banks, building societies, insurance companies, and other entities. Some of the functions of some of these agencies include authorizing insurance companies to do business, assessing solvency, and determining whether insurance companies comply with regulations. Australia and Germany have private sector-only approaches to insurance, and government involvement in pricing insurance is limited. For example, in Germany, prices are controlled only with respect to the company's overall financial safety and the equal treatment of all policyholders.
GAO-09-188R, Natural Hazard Mitigation and Insurance: The United States and Selected Countries Have Similar Natural Hazard Mitigation Policies but Different Insurance Approaches
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GAO-09-188R:
United States Government Accountability Office:
Washington, DC 20548:
December 22, 2008:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Shelley Moore Capito:
Ranking Member:
Subcommittee on Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives:
The Honorable Christopher Shays:
House of Representatives:
Subject: Natural Hazard Mitigation and Insurance: The United States and
Selected Countries Have Similar Natural Hazard Mitigation Policies but
Different Insurance Approaches:
Natural hazards adversely affect hundreds of thousands of people
worldwide each year and cause extensive property damage. In 2007, a
year that was not considered an exceptional one for natural hazards,
natural hazards caused an estimated 14,600 deaths and $70 billion in
property losses. For that year, the insurance industry covered $23.3
billion in losses. In catastrophic loss years, such as 2005--the year
that saw Hurricane Katrina--losses can be far greater. Scientific
assessments indicate that climate change is expected to alter the
frequency and severity of natural hazard events, and as a result,
losses can be expected to climb. Given this scenario, examining
policies that are used in other countries to reduce the loss of life
and property caused by natural hazard events and examining insurance
approaches that provide coverage for natural hazard losses can help
identify practices in both areas that could benefit the United States.
Similarly, given the ongoing challenges facing the United States,
international cooperative efforts may provide instructive examples of
risk management and disaster reduction.
Because of your interest in these areas, you asked us to (1) identify
policies used by other countries to reduce losses caused by natural
hazards; (2) examine the extent of international cooperation among
selected countries, including the United States, to mitigate natural
hazards; and (3) identify approaches that other industrialized
countries use to insure natural hazard risk and regulate insurers. The
briefing slides that we presented to committee staff on November 4,
2008, on the results of our review are reproduced in enclosure I of
this report.
Our scope was limited to industrialized countries with a representative
style of government. We selected countries from different regions of
the world that vary in area, population, and administrative divisions
but are susceptible to a number of natural hazards facing the United
States, such as floods, cyclones (hurricanes), earthquakes, wildland
fires, and landslides.[Footnote 1] Residential natural hazard insurance
is common in these countries. We included six countries in our review:
Australia, France, Germany, Japan, New Zealand, and Switzerland. We
reviewed and analyzed various studies and reports and interviewed U.S.
agency and foreign officials and individuals from academia, reinsurance
companies, and relevant organizations. We also interviewed and reviewed
written material from knowledgeable individuals from the six countries
we selected. We did not assess the effectiveness of the mitigation
policies, collaborative efforts, or insurance approaches within or
across countries. We provided relevant sections of our briefing slides
to country officials for review and comment and made technical changes
where appropriate.
We conducted this performance audit between November 2007 and October
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings based on our audit objectives.
Background:
Over the past two decades, losses resulting from natural hazards have
increased significantly, in part because of higher population densities
and development in hazard-prone areas. Over the past decade, some
countries have shifted their focus from disaster response and recovery
to mitigation--actions taken before or after a natural hazard event to
reduce the long-term risks to life and property. As described in
previous GAO work, mitigation can play a large role in reducing the
physical and financial impact of natural hazards.[Footnote 2] The
Federal Emergency Management Agency (FEMA) has reported that in the
United States, every $1 spent on mitigation saves society an average of
$4.[Footnote 3] In addition to mitigation, efforts to reduce losses
from natural hazards have included collaborative efforts. In previous
work, we identified key practices to enhance collaboration, such as (1)
defining and articulating a common outcome; (2) establishing mutually
reinforcing or joint strategies; (3) establishing approaches to working
together; (4) clarifying priorities, roles, and responsibilities; and
(5) developing mechanisms to monitor, evaluate, and report on results.
[Footnote 4]
Insurance is used to cover losses to real property or contents in the
event of natural hazards. It may be offered by the private sector,
government-backed entities, or a combination of both. Reinsurance, or
insurance for insurance companies, is used to cover risk that insurers
cannot or do not want to retain. Depending on the country, reinsurance
can be purchased from the government or from the private sector.
Insurers and reinsurers charge premiums to cover their potential
losses. Based on the countries we studied, insurance companies charge
the following types of premiums: (1) risk-based premiums, which are
calculated based on the potential for loss, often by using risk
modeling; (2) fixed premiums, which are set, not according to risk, but
on factors such as statutory requirements; and (3) fixed premiums that
are also based on risk but that take into account factors such as the
property's location and the materials used to build the structures.
We determined features of private sector and government insurance
programs in the six countries we studied. Private sector insurance is
purchased from insurance companies and may cover only some natural
hazards. Premiums for private insurance policies are risk-based and
insurance companies purchase reinsurance on the private market to
protect against catastrophic losses. Government insurance is generally
administered by private companies and requires that property insurance
policies cover certain natural hazards. Policyholders typically pay
additional fixed premiums beyond the cost of property insurance.
Finally, governments may guarantee financial assistance in the event of
a major natural hazard to protect against catastrophic losses.
The solvency of an insurance company is defined as its ability to pay
the claims of its policyholders. Government regulations have attempted
to promote solvency by establishing minimum capital and surplus
requirements, statutory accounting conventions, limits to insurance
company investment and corporate activities, financial ratio tests, and
financial data disclosure.
Summary:
The countries that we studied use a variety of policies to reduce
losses from natural hazards that are similar to policies used in the
United States. As we have previously reported, mitigation policies,
assessing and mapping hazard risk, land use planning, building codes,
and public awareness, can be used to reduce the risk of losses from
natural hazards.[Footnote 5] In France, for example, the government
provides hazard mapping information to depict areas prone to
landslides, earthquakes, floods, and avalanches to identify high-risk
areas where construction will be prohibited.[Footnote 6] Like the
United States, the countries we studied also use land use planning to
determine how best to develop hazard-prone areas. Germany, for example,
imposes strict land use planning requirements that prohibit new
development in areas designated as floodplains. Also like the United
States, some of these countries use building codes to make structures
more resistant to natural hazards. In Australia, regional governments
have improved standards beyond those required under the national
building code maintained by the Australian Building Codes Board to make
structures more resistant to hazards such as cyclones and earthquakes.
Further, policies in some countries are designed to educate the public
on the importance of mitigation. Japan, for instance, disseminates
information on natural hazard risks through different media, including
television, radio, newspapers, seminars, and lectures. As in the United
States, state-level and local governments in all of the countries we
studied have primary responsibility for formulating and implementing
policies to reduce losses from natural hazards. Local governments in
New Zealand are primarily responsible for implementing risk assessments
and mitigation policies, for example, and Swiss cantons are responsible
for implementing mitigation policies that they develop in coordination
with the federal government and other participants.
The countries we studied also participate in a variety of international
efforts to minimize natural hazard risk. We found that these efforts
are consistent with key practices in collaboration that we identified
in prior GAO work.[Footnote 7] For example, the Council of Europe
defines a common goal to improve resilience to major risks, including
natural hazards--a key practice in collaboration. Defining and
articulating a common outcome is a key practice in collaboration we
have previously identified. The United Nations International Strategy
for Disaster Reduction has created a set of principles to monitor,
evaluate, and report on disaster risk reduction, which is consistent
with developing mechanisms to monitor, evaluate, and report on results-
-another key practice we identified. In addition, a wide range of
stakeholders, including U.S. agencies, participate in cooperative
strategies and programs. For example, the U.S. Geological Survey is a
key participant in the Global Earthquake Model, a public-private
partnership among academia, governments, and the insurance industry to
calculate and communicate earthquake risk worldwide. And the U.S.
Forest Service participates in the Global Wildland Fire Network, which
provides a forum for wildfire management professionals, researchers,
and others to work on wildland fire risk management and disaster
reduction at the local, national, regional, and global levels.
The six countries we studied use a variety of approaches to insure
natural hazard risk and regulate insurers. Generally, their approaches
involve both the government and the private sector. In four countries
with government insurance approaches, property insurance policies
include natural hazard insurance coverage at a fixed premium, and three
of these countries have a government guarantee. All six countries have
some type of private insurance approach, and four of these countries
offer optional coverage of various natural hazards and have risk-based
premiums.
* Australia uses a private sector approach under which coverage for
most natural hazards is included with private homeowners insurance. The
cost of natural hazard insurance is market driven and involves no
government intervention. According to a report commissioned by the
Insurance Council of Australia, an estimated 23 percent of residential
households do not have property or contents insurance, leaving them
without basic natural hazard coverage. To cover potential losses,
insurance companies purchase reinsurance from private companies.
* France uses a government approach to insurance, which involves a
mandatory extension to property insurance policies provided by the
private sector. Policyholders pay an additional cost of 12 percent of
the property insurance premium for coverage against natural hazards.
The French government must declare a state of natural disaster for
coverage to take effect. According to agency officials, 90 to 95
percent of homes have property insurance and therefore have coverage
against natural hazards. French insurance companies can purchase
reinsurance from private companies or from a government reinsurance
agency.
* Under Japan's cost-sharing approach, the government and private
insurers share the cost of losses from earthquakes. Private insurers
are required to offer Earthquake Insurance on Dwelling Risks (EIDR),
but policyholders can decline it. An EIDR policy may cover all, half,
or some of the losses to the insured building, its contents, or both,
and policyholders may obtain premium discounts for meeting specified
earthquake-resistant building standards. By law, all EIDR insurance
policies are automatically reinsured with the Japan Earthquake
Reinsurance Company (JER). JER is then reinsured by private insurance
companies and the Japanese government. According to the Non-Life
Insurance Rating Organization of Japan, approximately 40 percent of
households had EIDR in 2005.
Finally, five countries have a centralized (federal-level) agency to
regulate the private insurance industry. Three of these government
agencies regulate the entire financial services industry--for example,
the Australian Prudential Regulation Authority oversees banks, building
societies, insurance companies, and other entities. Some of the
functions of some of these agencies include authorizing insurance
companies to do business, assessing solvency, and determining whether
insurance companies comply with regulations. Australia and Germany have
private sector-only approaches to insurance, and government involvement
in pricing insurance is limited. For example, in Germany, prices are
controlled only with respect to the company's overall financial safety
and the equal treatment of all policyholders.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this report. At that time, we will send copies of
this report to interested congressional committees and other parties.
In addition, the report will be available at no charge on GAO‘s Web
site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Major contributors to this report were
Andy Finkel, Assistant Director; Tania Calhoun; Emily Chalmers; Isidro
Gomez; Nisha Hazra; Rich LaMore; Marc Molino; and Tom Taydus.
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
Enclosure:
[End of section]
Enclosure I: Briefing Slides:
The United States and Selected Countries Have Similar Mitigation
Policies but Different Insurance Approaches:
Briefing to Congressional Requesters:
November 4, 2008:
Outline of Oral Briefing:
Introduction:
Objectives:
Scope and Methodology:
Results in Brief:
Background:
Other Countries‘ Policies to Reduce Losses from Natural Hazards Are
Similar to Those of the United States:
Cooperative Efforts to Mitigate Natural Hazards Exist Worldwide:
Other Countries Use Various Approaches to Insure Natural Hazard Risk:
[End of section]
Introduction:
Natural hazards adversely affect thousands of people worldwide each
year and cause extensive property damage.
In 2007, natural hazards caused an estimated 14,600 deaths and $70
billion in property losses.
Insurance covered $23.3 billion of the 2007 property losses that
otherwise might have been the responsibility of individual property
owners or governments.
Given the ongoing challenges facing the United States, international
cooperative efforts may provide instructive examples.
Insurance approaches in other countries may be informative as Congress
considers the appropriate role of the federal government in natural
hazard insurance.
Objectives:
* Identify policies used by other industrialized countries to reduce
losses caused by natural hazards.
* Examine the extent of international cooperation among selected
countries, including the United States, to mitigate natural hazards.
* Identify approaches that other industrialized countries use to insure
natural hazard risk and regulate insurers.
Scope:
Our review was limited to:
* industrialized countries;
* countries with a representative style of government;
* countries in different regions of the world;
* countries affected by natural hazards similar to those faced by the
United States, including:
- earthquakes, floods, hurricanes, landslides, tornadoes, wildland
fires (based on GAO-07-403);
* countries where residential natural hazard insurance is common.
Methodology:
* Reviewed and analyzed various studies and reports;
* Identified six countries for our review: Australia, France, Germany,
Japan, New Zealand, and Switzerland (the information in these slides
pertains only to these countries);
* Interviewed knowledgeable individuals from these six countries;
* Interviewed U.S. agency officials and individuals from academia, large
reinsurance companies, and relevant organizations;
* Contacted individuals from Supreme Audit Institutions to determine
whether they have done similar work;
* Conducted interviews in person or by phone;
* Reviewed written responses provided by some individuals;
* Did not assess the effectiveness of policies, collaborative efforts,
or insurance approaches;
* Due to variation in government structures, did not evaluate the
merits of mitigation policies or insurance approaches within or across
countries.
Results in Brief:
Other countries‘ policies to reduce losses from natural hazards are
similar to those in the United States.
* Among these policies are hazard assessments, land use planning,
building codes, and public awareness campaigns.
* State-level and local governments have primary responsibility for
formulating and implementing policies to reduce losses from natural
hazards.
A variety of international efforts exist to mitigate natural hazard
losses.
* International cooperative efforts are consistent with key practices
in collaboration.
* The U.S. participates in collaborative efforts that involve a wide
range of stakeholders.
The six countries we studied use various approaches to insure natural
hazard risk and regulate insurers:
* Natural hazard insurance generally involves both government and the
private sector;
* In four countries that have government insurance approaches, property
insurance polices include natural hazard coverage at a fixed premium,
and three of these countries have a government guarantee;
* Four countries with private insurance approaches have optional
coverage of various natural hazards and risk-based premiums;
* Five countries have centralized agencies that regulate the insurance
industry.
Background:
Over the past two decades, losses resulting from natural hazards have
increased significantly, in part because of higher population densities
and development in hazard-prone areas.
Over the past decade, some countries have shifted their focus from
disaster response and recovery to mitigation”actions taken before or
after a natural hazard event to reduce the long-term risks to life and
property from natural hazards.
Mitigation reduces the risk of losses of lives and property:
* A study of Federal Emergency Management Agency (FEMA) grants found
that every $1 spent on mitigation saved society an average of $4.
Table 1: Selected Information on the Countries We Studied:
Country: Australia;
Natural Hazards:
* Bush/wildland fires;
* Cyclones;
* Earthquakes;
* Floods;
* Landslides;
* Tornadoes;
* Other;
Administrative divisions: 6 states and 2 territories;
Area (in square miles): 2,967,909;
Estimated population (in millions): 20.6;
Government type: Federal parliamentary democracy.
Country: France;
Natural Hazards:
* Earthquakes;
* Floods;
* Landslides;
* Tornadoes;
* Other;
Administrative divisions: 22 regions;
Area (in square miles): 248,429;
Estimated population (in millions): 60.9;
Government type: Republic;
Country: Germany;
Natural Hazards:
* Bush/wildland fires;
* Cyclones;
* Earthquakes;
* Floods;
* Landslides;
* Tornadoes;
* Other;
Administrative divisions: 16 states;
Area (in square miles): 137,847;
Estimated population (in millions): 82.4;
Government type: Federal republic.
Country: Japan;
Natural Hazards:
* Cyclones;
* Earthquakes;
* Floods;
* Landslides;
* Tornadoes;
* Other;
Administrative divisions: 47 prefectures;
Area (in square miles): 145,883;
Estimated population (in millions): 127.3;
Government type: Constitutional monarchy with a parliamentary
government.
Country: New Zealand;
Natural Hazards:
* Cyclones;
* Earthquakes;
* Floods;
* Landslides;
* Tornadoes;
* Other;
Administrative divisions: 16 regions and 1 territory;
Area (in square miles): 103,738;
Estimated population (in millions): 4.2;
Government type: Parliamentary democracy.
Country: Switzerland;
Natural Hazards:
* Bush/wildland fires;
* Earthquakes;
* Floods;
* Landslides;
* Other;
Administrative divisions: 26 cantons;
Area (in square miles): 15,942;
Estimated population (in millions): 7.6;
Government type: Similar in structure to a federal republic.
Country: United States;
Natural Hazards:
* Bush/wildland fires;
* Cyclones;
* Earthquakes;
* Floods;
* Landslides;
* Tornadoes;
* Other;
Administrative divisions: 50 states and the District of Columbia;
Area (in square miles): 3,794,083;
Estimated population (in millions): 303.8;
Government type: Constitutional based federal republic.
Sources: CIA World Factbook, Munich Re, and GAO (data). Art Explosion
(images).
Note: Cyclones also include typhoons and hurricanes.
Other includes avalanches, hail storms, subsidence, tsunamis, volcanic
activity, or winter storms.
Country populations estimated as of July 2008.
[End of table]
Key Practices in Collaboration:
GAO has previously identified key practices to enhance collaboration,
such as:
* defining and articulating a common outcome;
* establishing mutually reinforcing or joint strategies;
* establishing approaches to working together;
* clarifying priorities, roles, and responsibilities;
* developing mechanisms to monitor, evaluate, and report on results.
Insurance and Reinsurance:
* Property insurance is purchased to cover damage to or loss of
property;
* Reinsurance is insurance for insurance companies and is used to cover
risk that insurers cannot or do not want to retain;
* The price of an insurance or reinsurance policy is known as the
premium;
* Insurers and reinsurers charge premiums to cover their potential
losses.
Types of Premiums:
* Risk-based:
- Premiums are calculated based on the potential for loss.
* Fixed:
- Premiums are a set rate that is not based on risk but may be based on
factors such as statutory requirements.
* Fixed based on risk:
- Premiums are a set rate that takes into account factors such as the
property‘s location and the materials used to build the structures.
Features of Private and Government Natural Hazard Insurance Programs in
the Countries We Studied:
Private sector insurance:
* Insurance is purchased from private companies;
* Property insurance policy may cover some natural hazards, but other
hazards may require a separate policy;
* Premiums are risk-based;
* Reinsurance is purchased on the private market to protect against
catastrophic losses.
Government insurance:
* Insurance is administered by private companies;
* Government requires that property insurance policies cover natural
hazards;
* Policyholder typically pays an additional fixed premium beyond the
cost of property insurance;
* Government may guarantee financial assistance in the event of a major
natural hazard to protect against catastrophic losses.
Solvency:
Solvency is the ability of an insurance company to pay the claims of
its policyholders.
Regulations to promote solvency include:
* minimum capital and surplus requirements;
* statutory accounting conventions;
* limits to insurance company investment and corporate activities;
* financial ratio tests;
* financial data disclosure.
[End of Background]
Mitigation Policies:
Other Countries‘ Policies to Reduce Losses from Natural Hazards Are
Similar to U.S. Policies:
In the countries we studied, natural hazard mitigation policies focus
on measures such as assessing and mapping hazard risk, planning for
hazard mitigation and land use, strengthening building codes and design
standards, and raising public awareness.
State-level and local governments have the primary responsibility for
formulating and implementing mitigation policies in the countries we
studied.
Hazard Mapping:
The countries we studied identify natural hazard risk by geographical
area.
France:
* The government provides information about natural hazard risks and
identifies hazard-prone areas;
* Hazard mapping identifies areas where new construction is banned (for
land use planning purposes).
New Zealand:
* The government updates maps covering a wide variety of hazards at
least every 5 years.
Switzerland:
* By 2011, the government plans to have completed hazard maps of the
entire country;
* Hazard mapping identifies areas where new construction is banned (for
land use planning purposes).
Land Use Planning:
The countries we studied determine how best to use land located in
hazard-prone areas:
France:
* Requires risk mitigation plans to identify types of hazards in
communities and help develop mitigation measures.
Germany:
* Requires states to designate more areas as floodplains, according to
2005 legislation;
* Imposes strict requirements on new housing in these areas.
Switzerland:
* Has a policy of ’making room for rivers“ that expands areas for
riverine overflows to mitigate the impact of floods.
Building Codes:
The countries we studied develop minimum requirements to make
structures more resistant to natural hazards.
Australia:
* Regional governments have improved standards to make structures more
resistant to hazards, such as cyclones and earthquakes, that go beyond
those required under the national building code maintained by the
Australian Building Codes Board.
Japan:
* Building codes and engineering standards are continuously assessed to
strengthen and retrofit buildings against earthquakes, tsunamis, and
other hazards.
New Zealand:
* Building codes have been strengthened to better withstand natural
hazards and provide guidance for retrofitting and demolition.
Public Awareness:
The countries we studied educate people on the need for mitigation and
its benefits.
Japan:
* Disseminates information on natural hazard risks through different
types of media, including television, radio, newspapers, seminars,
lectures, and posters.
Australia:
* Provides information on its emergency management Web site regarding
specific mitigation measures for selected hazards.
New Zealand:
* Advertises information on mitigation through television campaigns,
mailings, brochures, newspapers, and magazines and has also developed
two Web sites with information on mitigation.
State-Level and Local Governments Have Primary Responsibility for
Mitigation:
Australia:
* States and local communities have key roles in developing and
establishing mitigation priorities.
France:
* Local governments and communities are responsible for developing and
implementing risk prevention plans that are approved by the central
government.
Germany:
* States and local communities have primary responsibility for
implementing natural hazard policies.
Japan:
* Prefectures and municipalities develop their own disaster management
plans based on the mitigation policies developed at the national level.
New Zealand:
* Local governments are primarily responsible for implementing policies
for risk assessment and mitigation.
Switzerland:
* States are responsible for implementing mitigation policies that they
develop in coordination with the federal government and other
participants.
[End of section]
International Cooperation:
A Variety of International Efforts Exist to Mitigate Natural Hazard
Losses:
International cooperative efforts are consistent with key practices in
collaboration.
The United States participates in collaborative efforts that involve a
wide range of stakeholders.
Table: International Cooperative Efforts Are Consistent with Key
Practices in Collaboration:
Key practice in collaboration: Defining and articulating a common
outcome;
Organization: Council of Europe;
Purpose/goal: Defines a common goal to improve resilience to major
risks, including natural hazards.
Key practice in collaboration: Establishing mutually reinforcing or
joint strategies;
Organization: Australasian Fire and Emergency Services Authorities
Council;
Purpose/goal: Has established a joint fire management strategy for
Australia and New Zealand.
Key practice in collaboration: Establishing approaches to working
together;
Organization: Asian Disaster Reduction Center;
Purpose/goal: Works with member countries and other organizations to
develop strategies to enhance disaster resilience.
Key practice in collaboration: Clarifying priorities, roles, and
responsibilities;
Organization: International Consortium on Landslides;
Purpose/goal: Specifies future priorities and responsibilities on
landslide risk reduction.
Key practice in collaboration: Developing mechanisms to monitor,
evaluate, and report on results;
Organization: United Nations International Strategy for Disaster
Reduction;
Purpose/goal: Has created a set of principles to monitor, evaluate, and
report on disaster risk reduction.
[End of table]
The United States Participates in Collaborative Efforts Involving a
Range of Stakeholders:
A wide range of stakeholders, including U.S. agencies, participates in
a wide range of cooperative efforts:
* The U.S. Geological Survey is a key participant in the Global
Earthquake Model, a public-private partnership among academia,
governments, and the insurance industry to calculate and communicate
earthquake risk worldwide.
* The U.S. Forest Service participates in the Global Wildland Fire
Network, a forum for wildland fire management professionals,
politicians, and researchers to work on risk management and disaster
reduction at the local, national, regional, and global levels.
[End of section]
Insurance Approaches:
Other Countries Use Various Approaches to Insure Natural Hazard Risk
and Regulate Insurers:
* In the six countries we studied, insurance approaches generally
involve both the government and the private sector.
* In four countries that have government insurance approaches, property
insurance polices include natural hazard coverage at a fixed premium,
and three of these countries have a government guarantee.
* Four countries with private insurance approaches have optional
coverage of various natural hazards and have risk-based premiums.
* Five countries have centralized (federal-level) agencies that
regulate the insurance industry. [Footnote 8]
Table: Overview of Natural Hazard Insurance Approaches:
Country: Australia;
Program type: Private sector;
Program name: N/A;
Natural hazards covered: Insurance companies may provide coverage for
action of the sea, earthquake, erosion, flood, high water, landslide,
storm, subsidence, tempest, tsunami.
Country: France;
Program type: Government;
Program name: Catastrophes Naturelles (CATNAT);
Natural hazards covered: The government decides whether an event is a
natural disaster; some natural hazards that may be covered include
earthquake, flood, geotechnical subsidence, landslide, moving masses of
ice or snow, and tidal waves.
Country: France;
Program type: Private;
Program name: N/A;
Natural hazards covered: Wind damage due to storm.
Country: Germany;
Program type: Private;
Program name: N/A;
Natural hazards covered: Insurance companies may provide coverage for
avalanche, earthquake, flood, landslide, subsidence, weight of snow,
and volcanic eruption.
Country: Japan;
Program type: Government;
Program name: Earthquake Insurance on Dwelling Risk (EIDR);
Natural hazards covered: Earthquake, tsunami, volcanic eruption.
Country: Japan;
Program type: Private;
Program name: N/A;
Natural hazards covered: Other natural hazards such as storm and flood.
Country: New Zealand;
Program type: Government;
Program name: Earthquake Commission (EQC);
Natural hazards covered: Earthquake, hydrothermal activity, natural
landslide, tsunami, volcanic eruption; In the case of residential land,
a storm or flood, or fire caused by any of these.
Country: New Zealand;
Program type: Private;
Program name: N/A;
Natural hazards covered: Insurance companies may provide additional
coverage for any of the hazards covered by WQC; insurance companies may
also provide coverage for hazards not covered by EQC, such as flood.
Country: Switzerland;
Program type: Government;
Program name: Cantonal (State) Monopolies;
Natural hazards covered: Avalanche, flooding, hail, landslide,
rockfall, snow pressure, storm.
Country: Switzerland;
Program type: Private;
Program name: Swiss Natural Perils Pool;
Natural hazards covered: Avalanche, earthquake, flood, hail, landslide,
rockfall, snow pressure, storm.
Country: United States;
Program type: Government;
Program name: National Flood Insurance Program (NFIP);
Natural hazards covered: Flood.
Source: GAO (analysis); Art Explosion (images).
Note: The United States has multiple approaches to hazard insurance;
however, for the purposes of this report, we have included a
description of NFIP only.
[End of table]
Table: Insurance Approaches in the Countries We Studied Generally
Involve Both Government and the Private Sector:
Country: Australia;
Program type: Private sector;
Program name: N/A;
Natural hazard coverage required with property insurance: No;
Premium rates: Risk-based;
Government guarantee: No.
Country: France;
Program type: Government;
Program name: CATNAT;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Fixed;
Government guarantee: Yes.
Country: France;
Program type: Private sector;
Program name: N/A;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Risk-based;
Government guarantee: No.
Country: Germany;
Program type: Private sector;
Program name: N/A;
Natural hazard coverage required with property insurance: No;
Premium rates: Risk-based;
Government guarantee: No.
Country: Japan;
Program type: Government;
Program name: EIDR;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Fixed, based on risk;
Government guarantee: Yes.
Country: Japan;
Program type: Private sector;
Program name: N/A;
Natural hazard coverage required with property insurance: No;
Premium rates: Risk-based;
Government guarantee: No.
Country: New Zealand;
Program type: Government;
Program name: EQC;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Fixed;
Government guarantee: Yes.
Country: New Zealand;
Program type: Private sector;
Program name: N/A;
Natural hazard coverage required with property insurance: No;
Premium rates: Risk-based;
Government guarantee: No.
Country: Switzerland;
Program type: Government;
Program name: Cantonal (State) Monopolies;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Fixed;
Government guarantee: No.
Country: Switzerland;
Program type: Private sector;
Program name: Swiss Natural Perils Pool;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Fixed;
Government guarantee: No.
Country: United States;
Program type: Government;
Program name: NFIP;
Natural hazard coverage required with property insurance: Yes;
Premium rates: Risk-based;
Government guarantee: Yes.
Source: GAO (analysis); Art Explosion (images).
Note: In Japan, insures are required to include EIDR coverage with
property insurance, but policy holders are not required to take EIDR
coverage. In the United States, flood insurance through NFIP is only
mandatory for people living in high-risk areas.
[End of table]
Natural Hazard Insurance in Australia: A Private Sector Approach:
* Coverage for most natural hazards is included with property
insurance;
- Insurance companies can exclude coverage for any hazard, as long they
explicitly do so in writing.
* Cost of natural hazard insurance is market driven and involves no
government intervention.
* Premiums are risk-based and estimated at the zip code or property
level by individual companies on a case-by-case basis.
* One report estimated that approximately 23 percent of residential
households do not have property or contents insurance, leaving them
without basic natural hazard coverage.
* To cover potential losses, insurance companies purchase reinsurance
from private companies.
Natural Hazard Insurance in France: A Government Approach:
* By law, Catastrophes Naturelles (CATNAT) coverage is a mandatory
extension of property insurance policies provided by private insurance
companies.
* Policyholders pay an additional cost of 12 percent of the property
insurance premium for CATNAT coverage, a rate set in 1999.
* The government must declare a state of natural disaster for CATNAT
coverage to take effect.
* According to agency officials, 90 to 95 percent of homes have property
insurance and therefore have CATNAT coverage.
* French insurance companies can purchase reinsurance from private
companies or from Caisse Centrale de Reassurance (CCR), a government
reinsurance agency.
* Those that purchase reinsurance from CCR benefit from an unlimited
financial guarantee of losses by the French government:
- According to government officials, 80 percent of insurance companies
purchase reinsurance from CCR.
Reinsurance through CCR involves two different types of coverage that
work in tandem:
* Quota-share:
- The private insurer passes on a certain proportion of the premiums
collected to CCR, and CCR pays the same proportion of losses.
* Stop-loss:
- This coverage applies to the portion of the premiums retained by the
private insurer;
- The private insurer pays a deductible, which is an agreed-upon
percentage of the premiums retained;
- CCR can cover an unlimited amount beyond that deductible, given the
French government guarantee.
Earthquake Insurance on Dwelling Risks in Japan: A Cost-Sharing
Approach:
* Private insurers are required to offer optional Earthquake Insurance
on Dwelling Risks (EIDR), but policyholders can decline this coverage in
writing;
* An EIDR policy may cover all, half, or some of the losses to the
insured building, its contents, or both;
* Policyholders may obtain premium discounts:
- 10 percent if residential buildings meet earthquake-resistant
standards as stipulated in building code;
- 10 to 30 percent, depending on the earthquake-resistant class of
the building;
* Part of the earthquake insurance premium may be tax deductible;
* According to the Non-Life Insurance Rating Organization of Japan,
approximately 40 percent of households had EIDR in 2005;
* By law, all EIDR insurance policies are automatically reinsured with
the Japan Earthquake Reinsurance Company (JER);
* JER is then reinsured by private insurance companies and the Japanese
government;
* A liability-sharing scheme exists between the government and private
insurers to cover losses in the event of an earthquake.
Figure: [Refer to PDF for image]
This figure is a graph depicting the following liability-sharing
scheme:
Private liability: 100%;
Amount: 110 billion yen.
Government liability: 50%;
Private liability: 50%;
Amount: 1,730 billion yen.
Government liability: 95%;
Private liability: 5%;
Amount: 5,500 billion yen.
Source: General Insurance Association of Japan.
Note: Private insurers' liability includes the private insurers and
JER. 110 billion yen is approximately equal to 95 million U.S. dollars
based on Federal Reserve foreign exchange rates as of September 16,
2008.
[End of figure]
Five of the Countries We Studied Have Centralized Agencies That
Regulate the Insurance Industry:
* Five countries have a centralized (federal-level) agency to regulate
the private insurance industry, and New Zealand is creating one.
* Three of these agencies regulate the entire financial services
industry:
- For example, the Australian Prudential Regulation Authority oversees
banks, unions, building societies, insurance companies, friendly
societies, and superannuation funds.
* Some functions of some of these agencies in terms of insurance
include:
- authorizing insurance companies to do business;
- assessing and monitoring insurance company solvency;
- determining whether insurance companies comply with regulations.
* Australia and Germany have only private sector approaches to
insurance, and government involvement in pricing insurance is limited.
- For example, in Germany, prices are controlled only with respect to
the overall financial safety of the company and the equal treatment of
all policyholders.
[End of briefing slides]
Footnotes:
[1] For more information on natural hazards facing the United States,
see GAO, Natural Hazard Mitigation: Various Mitigation Efforts Exist,
but Federal Efforts Do Not Provide a Comprehensive Strategic Framework,
[hyperlink, http://www.gao.gov/products/GAO-07-403] (Washington, D.C.:
Aug. 22, 2007).
[2] [hyperlink, http://www.gao.gov/products/GAO-07-403].
[3] National Institute of Building Sciences, The Multihazard Mitigation
Council, Natural Hazard Mitigation Saves: An Independent Study to
Assess the Future Savings from Mitigation Activities (Washington, D.C.,
2005).
[4] [hyperlink, http://www.gao.gov/products/GAO-07-403].
[5] [hyperlink, http://www.gao.gov/products/GAO-07-403].
[6] Hazards noted refer to mainland France only and not its
territories.
[7] GAO, Results-Oriented Government: Practices That Can Help Enhance
and Sustain Collaboration among Federal Agencies, [hyperlink,
http://www.gao.gov/products/GAO-06-15], (Washington, D.C.: Oct. 21,
2005).
[8] In countries that do not have a federal system of government, there
may be no viable option other than centralized insurance regulation.
[End of section]
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