Much of Italy is vulnerable to natural catastrophe but risk management tools are just developing

Those who know Italy know what an exceptional country it is for its extraordinary concentration of unique works of art, the beauty of its towns and the charm of its countryside. In contrast to this beauty, however, Italy is also well known for its predisposition to natural disasters.

Between 1998 and 2002, Italy had the highest number of landslides, floods, fires and earthquakes in Europe.

Very few countries have such a high concentration of seismic and landslide zones, active volcanoes and flood basins. As often happens, the men who built such wonders as can been found in Venice, Florence, Rome and most other cities in Italy, did not respect nature's warnings, but built in ways and places they should not have done. Construction proliferates on the slopes of Mt Vesuvius; buildings, bridges and roads are commonplace where rivers burst their banks and the ground trembles.

In addition, there is a problem within this problem for those who are involved with forecasting and insuring against these risks, and that is insufficient, reliable and readily accessible data on the probability of such risks. The assessment of flood risks, for example, lacks a detailed map of risk areas throughout the entire Italian territory. This renders the systematic prevention of such a catastrophe difficult, which has proved one of the main obstacles preventing the introduction of a law enforcing compulsory insurance against natural disasters in Italy.

In fact, it has always been impossible to determine, other than approximately, the level of risk of a certain geographical area and the probability of claims arising in this area, and for the insurers, therefore, the calculation of the right premium for such coverage of such risks.

As a result of the increase in reinsurance costs for natural catastrophes and the growing demand for such coverage, the Generali Group Companies have recently equipped themselves with an analytical tool for flood risk evaluation. With the help of the National Research Centre (CNR) and the Italian National Association of Insurance Enterprises (ANIA), the group has initiated a project mapping the territory of Italy showing risk levels in the different geographical areas.

Realised by the Generali Group in March 2004, the flood risk tool permits the 'mapping' of risk levels throughout Italy's 8,099 towns by calculating the hydrological rainfall levels in each area. The towns are ranked into five classes, where class 1 signifies low risk and 5 signifies high risk.

More than a quarter of the towns, 27.5%, fall into the high risk classes (4 and 5) with a total of 1,636 and 639 towns respectively.

ANIA's project, recently contracted to specialised companies, foresees the completion of more detailed map (20x30 m scale) within the next three years. This will allow all companies operating in Italy to assess flood risks and calculate premiums accordingly.

Another important risk that has repeatedly highlighted Italy's vulnerability to natural disasters is that of earthquakes. Over time, this has received some of the attention it deserves in the form of a map of seismic areas in Italy, which has recently been updated. This map defines risks on a scale of danger from one to four. In this case, 37.5% of Italian towns feature in the most dangerous categories, with 716 in the most dangerous class 1 and 2,325 in class 2.

Compulsory insurance

In the period of approximately 30 years between 1968 to 1996, the Italian State paid an average annual sum of 3.5 million for damages resulting from catastrophic events.

The improved assessment of risk is expected to provide an answer to the difficult question of premium calculation for the compulsory catastrophe cover of the proposed new law, so a premium can be set for each individual according to where he/she lives, as the state can no longer sustain the cost of damages. If the state is able to ensure that insurers accept responsibility for even part of the cost of such damages by rendering insurance against such risks obligatory, this could well constitute a significant saving for the state.

Stefano Pace is in charge of Generali's Italian property portfolio.