The Federation of European Risk Management Associations (FERMA) has told the European Commission that any new insurance solutions for catastrophe risks should be market based and respect freedom of choice for company insurance buyers.

FERMA has made this comment in its response to the European Commission green paper on natural and man-made disasters.

In its response, FERMA stresses the importance of suitable risk pricing as a mechanism to promote a culture of risk management. It says that where the private market is mature and working well, a compulsory scheme is not desirable. It would create moral hazard – meaning it would not encourage mitigation measures because rates would be divorced from exposure.

In any case, FERMA argues, insurers and risk managers must have equal access to natural catastrophe data collected and processed by entities at EU level ahead of any move towards a mandatory financial security scheme.  

FERMA Vice-President Michel Dennery comments, “Generally speaking, as insurance buying and risk management professionals, our members do not see any reason for a mandatory framework to improve insurance market capacities. Although some international companies would like to find higher coverage than is currently available, the options assessed in this green paper do not seem to bring enough disruption to improve the capacity of the market.

“The biggest and medium sized companies are already aware of their exposures in case of a major event. Their risk managers have, for a long time, pushed their management to mitigate this risk first by increasing technical defenses, improving processes and training the management how to handle crises, and then by buying insurance to finance the damages, business interruption and third party liabilities.”

Some other highlights of the response: 

• Long-term disaster contracts are an interesting option which would require further analysis and feedback on the existing solutions. Five years is probably the maximum period practical to match the changing needs of business.
• A parametric solution for EU-wide catastrophe risk is potentially very expensive and uncertain because of the level of data that would need to be collected and analysed.
• Public risk management is also necessary and the Member States have the responsibility to develop public policies to reduce the impact of disasters through the adaptation of current and planned public infrastructure.