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Severe weather can cost billions in damage and lost revenue, and its impact on insurance and risk management looks set to increase

This article was first published in the February 2011 International issue of Accounting and Business magazine

Everyone remembers the terrible floods of 2002 that wreaked havoc in the Czech Republic and elsewhere in Central Europe. Since then, the region has suffered many more such incidents, and the recent heatwave in Russia, blizzards in North America, and floods in Pakistan, Australia and Brazil have been a stark reminder of the dangers posed by extreme weather.

For businesses in Central Europe, one of the only certainties is the need to factor more uncertainty into risk management. ‘Based on the frequency of natural disasters and statistics, extreme events will occur more often. This risk really is increasing,’ says Marcela Kotyrová, education and communications manager at the Czech Insurance Association.

According to Kotyrová, since 1997, when the Czech Republic suffered some of its worst flooding in history, natural disasters have occurred on an almost annual basis – whether they have been caused by snow, floods or storms. Over the past 15 years insurance companies have had to pay out more than CZK90bn (E3.7bn) in damages.

Hungary has also seen a rise in the number of insurance incidents. ‘The statistics of earlier years show a clear rise in the number of claims caused by natural hazards. This year stands out because we received as many claims during the last four months as in the whole of last year,’ says Andrea Horváth, a member of the board at insurance firm Allianz Hungary.

The number of claims resulting from flood damage received by Allianz in 2010 amounted to more than 4,000. The firm has paid out more than HUF1.2bn (E4.3m) altogether, a figure exceeding those of previous years significantly, ‘when the average number of similar claims was approximately 100 and payments were around HUF10m,’ Horváth adds.

The Czech Republic, Slovakia, Poland and Hungary, among other countries, were badly affected by floods in June 2009. In the summer of 2010, the region was hit by more floods and witnessed other extreme weather, such as a long and severe winter and an extremely hot summer. These trends are in line with predictions of climatologists, and although extreme weather events are occurring with greater frequency worldwide, events such as repeated flooding have been particularly noticeable in Central Europe over the past two years.

Catastrophe cover

Such events are affecting the relationship between insurance companies and insurers in Central Europe. In the Czech Republic, for example, ‘reinsurers are no longer willing to cover catastrophic risks, mainly floods, but also other risks such as rainstorms or hailstorms, in proportional reinsurance,’ says Veronika Hášová, internal communications manager at Czech insurance company Ceská pojišt’ovna. This is why, since 2003, such risks have been covered by non-proportional contracts only, she says.

The 2002 floods in the Czech Republic also pushed up the price of reinsurance, she adds, although prices are not expected to increase further. However, catastrophes occurring on the other side of the globe can impact the insurance price in the Czech Republic because of global uncertainty.

Insurance companies in Central Europe themselves are seeing the impacts of extreme weather in changing loss ratios. According to a report published by Raiffeisen Centrobank on insurer Vienna Insurance Group, ‘the rising loss ratio was driven by unfavourable weather conditions, leading to higher damage from flooding and hailstorms in Austria and the Czech Republic’. It states that even if there were a decrease in the number of extreme weather incidents in future years, the loss ratios would be unlikely to improve due to other factors.

Such companies are reviewing their policies and adopting a much stricter approach to natural hazard risks, especially recurring incidents. ‘It is likely the increased level of risk and tightened conditions of the reinsurance companies will affect the terms of insurance cover in the Czech Republic,’ says Kotyrová, explaining that raised premiums for clients may have to be considered. Analysts also believe that insurance firms should consider greater market segmentation and stricter policy conditions.

Olt Boglárka, communications manager at Generali Hungary, takes a similar view. ‘Based on the current market situation, we are not planning to increase premiums, but if the reinsurance environment forces us, we will have to consider this too,’ she says.

On the insured side, Central European firms are becoming more aware of the risks posed by extreme weather, and some are already considering severe weather mitigation in their risk management. CTP Invest, a business park developer throughout the region, is taking extreme weather into account in its projects. ‘Our in-house design team, together with external specialists, reviews systems continuously to ensure that what we build can stand all weather conditions,’ says Remon Vos, CEO of CTP Invest.

Škoda Auto, the Czech Republic’s second-largest company in terms of sales, and owned by German-based Volkswagen Group, also has measures in place. The firm was affected by severe flooding that devastated North Bohemia in mid-August, resulting in temporary suspension of part of the firm’s output for a few days. Rudolf Dreithaler, spokesman at Škoda Auto, believes the company coped well through ‘an internal procedure for dealing with crisis situations that proved to be well set out during the floods in Chrastava. This issue concerns all our business partners.’

But even if companies are well-placed to cope with extreme weather and minimise damage, the wider impact on local economies remains an issue. The August 2010 floods also had a serious impact on one of Škoda Auto’s suppliers, Grupo Antolin, a Spanish-based automotive supplier that operates a plant in Chrastava, in the north of the Czech Republic. Work resumed at Grupo Antolin six days after the firm suffered extensive damage, and the mayor of Chrastava expressed fears that the company would pull out of the area.

Despite the damage locally, the floods have had a less severe impact than was predicted on the Central European economies at a national level. However, governments are increasingly involved in mitigating impacts and so increase their natural disaster funds accordingly, and it is likely they will have to do so increasingly in future.

In the Czech Republic, this figure has typically been up to CZK3bn (E123.4m). In the 2011 budget proposal, the reserve amount is CZK3.8bn (E156.3m); CZK4bn (E164.5m) for past damage. ‘These figures will have to be increased,’ says Pavel Mertlík, chief economist at Raiffeisenbank Czech Republic. However, allocating such amounts of money will not be easy in the current economic climate.

David Creighton, journalist

Last updated: 4 Apr 2014