Alternative solutions for public and private catastrophe funding in Austria

Abstract

Abstract. The impacts of natural hazards as well as their frequency of occurrence during the last decades have increased decisively. Therefore, the public as well as the private sector are expected to react to this development by providing sufficient funds, in particular for the improvement of protection measures and an enhanced funding of damage compensation for affected private individuals, corporate and public entities.From the public stance, the establishment of an appropriate regulatory environment seems to be indispensable. Structural and legal changes should, on the one hand, renew and improve the current distribution system of public catastrophe funds as well as the profitable investment of these financial resources, and on the other hand, facilitate the application of alternative mechanisms provided by the capital and insurance markets.In particular, capital markets have developed alternative risk transfer and financing mechanisms, such as captive insurance companies, risk pooling, contingent capital solutions, multi-trigger products and insurance securitisation for hard insurance market phases. These instruments have already been applied to catastrophic (re-)insurance in other countries (mainly the US and off-shore domiciles), and may contribute positively to the insurability of extreme weather events in Austria by enhancing financial capacities. Not only private individuals and corporate entities may use alternative mechanisms in order to retain, thus, to finance certain risks, but also public institutions.This contribution aims at analysing potential solutions for an improved risk management of natural hazards in the private and the public sector by considering alternative mechanisms of the capital and insurance markets. Also the establishment of public-private-partnerships, which may contribute to a more efficient cat funding system in Austria, is considered.

The price of safety: costs for mitigating and coping with Alpine hazards

“…These data stem from estimates of the direct losses of private households and companies and were provided by the federal state, based on the Austrian Disaster Fund Act as a basis for disaster relief (Republik Österreich, 1996). The risk transfer system in Austria is organized on this fund and on private insurances, although private insurances rarely cover floods and similar processes (Gruber, 2008;Holub and Fuchs, 2009). The disaster fund is financed by taxes and additional resources in case of exceptional hazard events (Vetters and Prettenthaler, 2004;Fuchs, 2009).…”

A coupled vulnerability approach for European mountain regions

“…The latter is of particular importance since for private households natural hazards are not entirely subject to any comprehensive insurance system in Austria so far [6]. Apart from very limited coverage included in some household policies up to a sum of between €3,700 and €15,000 per contract [21], losses resulting from mountain hazards are not insurable since the risk is not taken over by the insurance companies. Hence, the compensation mechanism of the disaster fund has to be considered as the only available instrument of institutionalised disaster aid in Austria (cf.…”

“…However, effectiveness is varied, schemes are often inefficiently administered and decisions politically motivated [20]. Apart from this overall criticism, any adoption of government compensation alongside an existing commercial hazard insurance industry is reported to act as a major disincentive towards individuals purchasing their own insurance [21]. The tendency of individuals not to insure (or take any other mitigation action) as a result of the reliance on expected financial assistance from government relief programs or donations by other individuals has been reported as charity hazard [22].…”

Regional economic impacts of natural hazards – the case of the 2005 Alpine flood event in Tyrol (Austria)

“…These data stem from estimates of the direct losses of private households and companies and were provided by the Federal State of Tyrol, department for rural areas and agriculture, based on the Austrian Disaster Fund Act as a basis for disaster relief. Austria has a national risk transfer system, which relies primarily on a public funding scheme based on the Disaster Fund Act of 1966 1 with several amendments in recent decades (Gruber, 2008). Private insurance companies rarely cover floods and similar processes (Holub and Fuchs, 2009 …”