Switzerland. 1. Exposure to loss situation

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1 Switzerland 1. Exposure to loss situation Given its location in mid-latitudes characterised by the seasons and changes in the weather, as well as by the very varied topography - wide valleys, hilly country interspersed with narrow valleys and mountainous landscapes ranging from low to high Alps - a large number of hazardous natural actions take place in Switzerland in a relatively small area. However, the mountain ranges which work as meteorological divides generally prevent any individual large loss event from affecting the whole country. Of all the natural hazards that occur in Switzerland, avalanches claim the most human lives. However, most damage to property is caused by flooding, hailstorms and storm-force winds. Looking at a cross-section over a period of many years, they are responsible for a good 95% of losses due to natural hazards. On the basis of the fact that their occurrence is quite strictly limited in terms of time and areas affected, such hazardous incidents as snow pressure, rock falls, rockslides and landslips are, on the other hand, relatively insignificant. On average, avalanches claim 25 lives each year in the Alps. But clearly here we must distinguish between, on the one hand, large avalanches that only occur in populated valley locations in exceptional cases, where they can cause death and destruction, and, on the other hand, the far more frequent smaller avalanches caused by skiers. In most cases, they are themselves responsible for triggering the avalanches that engulf them. As opposed to large avalanches, the danger zone here is sought out more or less deliberately. The last "avalanche winter", which apart from claiming many human lives, also caused widespread damage to buildings and infrastructure, was that of the 1998/1999 season. Averaged out over many years, it is clearly the actions of flooding that have been responsible for the highest loss amounts. These can manifest themselves in the most varied of ways: whilst in regions with steep hills it is primarily bodies of flowing water with mud flows, rubble deposits, localised flooding and bank erosion, but also concentrated water run-off that cause damage, large-area floods caused by rivers, lakes and groundwater discharge are widely associated with flat land. Apart from brief heavy bursts of precipitation, other possible causes include long-lasting rainfall, drastic snow melt or a combination of these processes. The most serious damage due to flooding in recent years was due to the events between 21 and 23 August 2005, as a result of several days of heavy precipitation. The north side of the Alps in particular was affected with devastating mud flows, streams breaking their banks, bank erosion and large areas of flooding of the valley bottoms, accompanied by lots of landslips. The resulting damage to property ran to around CHF 3 billion. As a result, the previous record loss amount of CHF 1.8 billion, for which the winter storm "Lothar" on 26 December 1999 was responsible in the cantons (member states) to the north of the Alps, was beaten substantially. Thunderstorms, on the other hand, only cause storm damage locally and are, by comparison, insignificant. Finally, considerable damage is possible due to hailstorms, especially in the particularly endangered regions along the northern foothills of the Alps, as well as in southern Ticino. For instance, in the

2 spring and summer of 2009, thunder cells passed one after another through several cantons and left a trail of hailstone damage to crops, buildings and vehicles amounting to an all-time high figure of around CHF 500 million. Earthquakes happen considerably less frequently but have the potential to cause more damage. In the last four centuries alone in Switzerland, about 30 earthquakes have been recorded with an intensity of VII or more on the EMS scale. The most severe earthquake in Central Europe in the last thousand years took place on 18 October 1356 to the south of Basel, leaving the city in ruins - and ashes as a result of the fires that broke out afterwards. Intensities of up to IX were reached at the epicentre. But even at distances of over 80 km, cracks were formed in castle walls a metre thick. A comparable earthquake today would result in the deaths of over a thousand people and losses approaching CHF 80 billion. In general terms, you can say that earthquakes with an intensity of VII (damaging) or higher can be expected once every ten years and those with an intensity of VIII (heavily damaging) or above every hundred years. Even if the danger of an earthquake in Switzerland is classified as medium scale compared with other countries, the potential hazard is still far from negligible. 2. Direct insurance in the natural hazard sector Switzerland has nationwide natural hazard insurance for content and buildings. Natural hazard insurance is mandatorily linked to fire insurance. A dual insurance system exists in Switzerland:

3 a) In 19 of the 26 cantons there exists an obligation to insure, i.e. home owners are obliged to take out insurance protection with a Public Insurance Company for Buildings (PIB) (monopoly). 82% of the value of buildings insurance in Switzerland is covered by this PIB system. In three cantons, content must also be insured by the PIB. b) In the remaining seven cantons 18% of the buildings value in Switzerland the building stock is covered by private insurers, for the most part on a mandatory basis. Moreover, the private insurance industry covers content in 23 cantons. The cover is very similar overall in the case of cantonal buildings insurance companies and private insurance companies. This affects both the loss occurrences insured and the conditions of insurance. Insurance is "new for old" with both the PIBs and private insurance companies. a) Public Insurance Company for Buildings - Insurance Public Insurance Companies for Buildings are independent organisations subject to public law. The legislation affecting PIBs is cantonal. Therefore it can vary from one PIB to the next. PIBs are non-profit companies, in other words they do not work with the aim of making a profit. As no dividends have to be paid out and there are no acquisition/advertising costs, the premiums are significantly lower than in the private insurance industry. Also, the PIBs have lower administration costs. All building owners are obliged to insure with the Public Insurance Company for Buildings operating in their particular canton. The only exceptions are buildings owned by the Swiss Confederation. On the other hand, the PIBs are obliged to provide insurance cover for all buildings in their territory, and irrespective of their exposure to risks and hazards. In this way, adverse selection and risk-selection are prevented effectively: there is no "fighting" over "good risks" and mutual solidarity is at a maximum. In addition, this results in the greatest possible risk collective, whereby premiums remain affordable for all policyholders. Natural hazard losses that are caused by storms, hail, flooding, landslips/collapses, snow pressure and avalanches are insured, but not losses caused by earthquakes. Besides buildings, the PIBs in the cantons of Nidwalden, Vaud and Glarus also insure content. The insurance cover of the PIBs is unlimited. A state guarantee for this only exists in one case, namely the canton of Nidwalden.

4 The cantonal buildings insurance companies do not regard themselves simply as insurers: under the slogan of "Insure and Prevent", they are also heavily committed to preventing and combating loss (loss prevention and mitigation). - Prevention Thanks to the monopoly they hold, the preventive efforts of the PIBs benefit themselves (and their policyholders). Given that, as a rule, preventive measures to protect goods are as a rule cheaper than compensation for actual damage, effective preventive measures are in the best interests of the PIBs. They can thus optimise the allocation of resources between prevention and payments for losses to control the risk involved. The range of preventive measures when it comes to natural hazards is extensive: Recommendations as to how building owners should behave, property protection guidelines with regard to recommended construction designs and materials, free text messages and internet bad weather warning systems, subsidies for building protection measures, active involvement in the town planning sector (creation and publication of maps showing natural hazards). Legal foundations support the PIBs in their efforts to implement preventive measures. - Loss mitigation The PIBs support the fire brigades / rescue forces, in that they provide substantial help in the financing of their training, remuneration, co-ordination and operating resources. In this way, it is ensured that they are able to effectively carry out their duties in terms of search and rescue and minimisation of losses. Thanks to their territorial activities, in particular in the area of prevention and due to their joint orientation, the monopoly of the PIBs does not clash with the freedom of services and competition law of the European Union (and consequently the virtual ban on monopolies). These days, the PIBs see themselves less as insurance companies, but more in the role of a company offering a public service, in that the capital value of house owners is protected comprehensively. b) Private insurance companies - Insurance With the exception of Glarus, Nidwalden and Vaud, content is insured in all cantons by private firms, although in seven they also insure the building stock. In the cantons of Schwyz, Uri and Obwalden, there exists an obligation to insure, whereas in the cantons of Appenzell-Innerrhoden, Genève, Valais and Ticino, insurance is optional. The Insurance Supervision Act demands that private insurers also cover natural hazards as well as fire. The same risks that the PIBs cover are also insured here, that is storms, hail, flooding,

5 landslips/collapses, snow pressure and avalanches. The extent of the cover offered by private insurers is also standardised by law, in order to increase solidarity amongst insured parties. In contrast to PIBs, the cover offered by the private insurance industry is limited both per policyholder and per event. - Prevention: Prevention in a competitive environment is not necessarily to the benefit of those insurers who provide it and restricts the motivation for preventive measures in the case of private insurance companies. However, larger insurance companies in particular are active when it comes to prevention. The involvement ranges from awareness campaigns to bad weather warnings by text messages and on the internet, contributions to flood prevention measures and the sponsorship of a professorship in the field of natural hazards and climate change. Last but not least, preventive measures in the case of private insurance companies have the aim of making people aware of the insurance company and enabling them to rise above the competition in a positive manner. They therefore have an important publicity role to play. 3. Reinsurance structures a) Public Insurance Company for Buildings The 19 cantonal Public Insurance Company for Buildings are combined in the Intercantonal Reinsurance (IRV). With the aid of this self-help organisation, they jointly cover their reinsurance requirements in terms of fire and natural hazards. In this way, the IRV itself bears part of the bundled risks with the help of the reinsurance premiums of the PIBs. Premiums and reinsurance cover between each PIB and the IRV are negotiated individually. The IRV places parts of the risks assumed on the national and international reinsurance market. Thanks to the integrative presence of the IRV, the PIBs carry more weight with the reinsurers than they would have done as individual organisations. For losses due to natural hazards, stop-loss contracts are concluded, with the finer details formulated individually according to the wishes of the PIBs: all the losses of a particular year are totalled up and reinsured together. This also applies for the IRV in relation to its reinsurance programmes. With the help of the Intercantonal Risk Community (IRG), major incidents in the territories of the 19 PIBs in the natural hazard sector are covered. Here it is a case of a loss pool in which all 19 PIBs and the IRV have a shareholding. Losses incurred by a PIB are redistributed amongst all the members of the IRG using a distribution key, in so doing the risk is distributed amongst many risk carriers jointly. The individual PIBs have made bonded provisions for this. Each PIB bears a loss occurrence itself up to an individually defined limit for major losses. If this large loss limit is exceeded, then the IRV and all the other PIBs contribute to the excess according to their specific contingent liabilities. In summary, the insurance system of the PIBs and IRV can be simplified into the following three grades:

6 Average losses are borne by the PIBs themselves. In the event of large losses, the IRV steps in and covers a significant part of the losses, with the involvement of the PIB in question. In this respect, it can fall back on the reinsurance market (retrocession). In the event of extraordinarily high losses which exceed the threshold defined for each PIB (large loss limit), the IRV steps in. The available capacity of the IRV currently stands at CHF 750 million (2010). b) Private insurance companies 15 private insurers that jointly cover 95% of the market have joined together to establish the common Swiss Natural Hazard Pool. In the case of an incident, 80% of the losses are not borne by the affected insurance company on its own, but jointly via the pool. The remaining 20% is for the account of the affected insurance company in the form of a self-retention. As insurers that are part of the pool must contribute to all losses, the diversification of risks is improved and the risk for individual insurers is noticeably reduced. The reinsurance of private insurers that are part of the Swiss Natural Hazard Pool is organised jointly. This means the insurers involved can act as a single unit, which gives them more weight in the reinsurance market. 4. Earthquake insurance Earthquake damage to buildings in cantons with a PIB are with the exception of those in the canton of Zurich excluded from insurance cover. However, a joint pool of the remaining 18 Public Insurance Company for Buildings exists which is intended to cover losses caused by earthquakes. This cover is provided by the PIBs voluntarily, i.e. without charging a premium, but also without legally enforceable claims on the part of policyholders and offers an available capacity of CHF 2 billion. The prerequisite for payments is an earthquake in the territory of the PIB with an intensity of at least VII on the EMS scale. The Public Insurance Company for Buildings of the canton of Zurich makes available CHF 1 billion for damage to buildings caused by earthquakes. Again here, the prerequisite is an earthquake intensity of VII or higher. Unlike the system in the other 18 PIB cantons, in Zurich cantonal insurance cover in the event of an earthquake is legally guaranteed. In all cantons with the exception of Zurich, home owners have the option of arranging their own individual earthquake insurance. Various private insurance companies offer appropriate products. Taking out private building earthquake insurance in the PIB cantons means automatic exclusion from compensation of losses from the earthquake pool.

7 In order to also insure content against earthquake, customers must turn to private insurers in all cantons. A joint initiative of the PIBs and private insurers to set up an obligatory comprehensive insurance market solution for earthquake failed. Further information: Cantonal buildings insurance companies: Private insurance companies: