Catastrophe risk in Malta : evaluation and risk control from an insurance perspective

Abstract

Catastrophes occur when least expected and are the cause of human hardship and severe economic consequences. The purpose of this paper is to examine and assess the risk posed by catastrophes, both natural and man-made, as defined in the introduction. In addition, the study investigates the role of the Government and insurance companies in mitigating catastrophes and the respective methods adopted to mitigate the risk posed by the defined catastrophes. Design: In order to achieve the desired objectives, semi-structured formal interviews were carried out with the experts from insurance companies and insurance agencies. These were conducted in the period between November 2013 and February 2014 and a response rate of 85.7% was achieved. Findings: The study evidenced that natural catastrophes are addressed well by both the insurance industry and the Government. This is due to the availability of reinsurance treaties and national projects undertaken by the Government. On the other hand, the analysed risks of man-made catastrophes are uninsured in the local market. This is due to the heavy reliance on traditional risk transfer mechanisms that cater for standard risk. Additionally, this means that an alternative risk transfer mechanism is non-existent in Malta. Consequently, it is up to the Government to employ mitigation techniques in order to counteract catastrophe risks. Conclusion: The study concludes that natural catastrophes are well catered for by both the Government and the insurance companies. However, in a collective manner, there is room for improvement in both the Government and insurance industry with respect to manmade catastrophes. Furthermore, standard and traditional mitigation techniques are dominant in the local insurance industry. Value: It is hoped that this study, together with the various proposed recommendations, will increase the awareness on the risk of catastrophes in Malta and will also be useful in reducing the effects of catastrophe with regards to human hardship and economic impacts. The proposed recommendations include: an increase in risk-sharing with consumers, the introduction of terrorism cover with Government capping, the introduction and implementation of revised building codes, and pressure on the Government to invest heavily in oil-spill pollution.