Spanish Catastrophe Insurance Is World-Leading. How Will It Deal With Escalating Climate Change?

Forbes

2 days ago

A resident of Chiva, Spain cleans the outside of her home after flooding in November 2024. ... More (Photographer: Angel Garcia)
When Andriy Drohorub, his wife, and their two daughters left Ukraine for Spain in June 2024, they were seeking a safer life. Two months later Drohorub bought a ground-floor apartment in the village of Alfafara. There was so much to do—learning Spanish, trying to get his medical credentials recognized, looking for online work in the meantime—that he didn't have time to buy insurance. Because he didn't need a mortgage, he wasn't required to take out home insurance.
The family had only been in their new home for four months when, in late October, intense rainfall led to flooding in southern and eastern Spain. The violence of the gushing water was intense. Windows blew out, chunks of the walls peeled off, and furniture was knocked over. Mud and debris accumulated everywhere. 'The house was completely destroyed,' Drohorub reports.
It could have been even worse. An elderly neighbor died, one of at least 232 people to die in the floods caused by the weather phenomenon known as DANA (Depresión Aislada en Niveles Altos). Emergency alerts came too late for many.
In the aftermath, as the family sought to rebuild their lives again, Drohorub wasn't able to obtain government help. He had to take out a loan to make repairs. He's grateful to rescuers, police, and volunteers who helped the family with furniture and appliances. 'The people here are very friendly and close-knit, but the state has a lot of bureaucracy and everything is very slow,' Drohorub feels. Though the apartment isn't back to 100%, it's now liveable again.
One question is whether insurance could have helped the family get back on its feet earlier, and without turning to debt.
How Spanish Catastrophe Insurance Works
The Consorcio de Compensación de Seguros (CCS – Insurance Compensation Consortium) is the Spanish system for protecting insured people from extraordinary risks. It was set up in 1941, after the turmoil of the Spanish Civil War. CCS is a public company run by government officials and representatives of private insurance companies.
Anyone with life, accident, property, or business interruption insurance is covered under CCS. This encompasses 140 million policies. The consortium is funded by a 0.15% charge on the gross premiums, which insurers are required to collect. For a car owner, this amounts to about €2 a year. For the owner of a €200,000 home, this would be €14.
Though small, this surcharge embeds a kind of solidarity among all insurance policyholders in Spain, believes Francisco Espejo Gil, the assistant director for research and international relations at CCS. Whether they're in a flood-prone part of Spain or not, everyone pays the same. He refers to this as 'a community insurance at a national scale.'
In Espejo's view, everybody wins: insurers have a secure market (albeit with less flexibility). Individuals have guaranteed coverage for extraordinary events (as long as they're covered for ordinary ones). And public emergency budgets are kept in check by an insurance system that most people opt into (about 80% of residential properties are covered, according to Espejo). This isn't a system just for the rich or just for the poor—most groups are covered.
However, it's not a perfect system. Some home and car owners are disappointed and confused by low appraisals of their damaged property. Some are angry at delays in processing claims. Espejo says that CCS aims to pay about 80% of the total losses in the first four months of an extraordinary event. According to him, that target is normally achieved for small to medium events. Of course, the Valencia flooding was a very large and devastating event.
CCS has now paid out almost all of the home and car claims, but the processing rates are lower for industrial and civil infrastructure, which involves more complex assessments.
Cascading Climate Risks
Then there's the threat multiplier of climate change. DANA has been the costliest event in CCS' 70-year history. CCS paid out more in DANA claims than in the next 10 most expensive events combined. 'This was a very serious outlier in terms of frequency and intensity. Truly we are witnessing an intensification in both hazard and exposure,' Espejo says somberly. The flooding didn't break CCS, but with losses amounting to €4.5 billion, it came close to the probable maximum loss of over €5 billion.
A man sits behind a pile of mud in Paiporta, Spain, following flooding in November 2024. ... More (Photographer: Jose Jordan)
Espejo, a meteorologist, explains, 'The Mediterranean Sea is reaching sea surface temperature of nearly or above 30° in the summer, and that's a weather bomb. For each degree that the temperature of the air rises, the capacity of the atmosphere to hold water vapor rises by 7%.' A hotter sea and a more humid atmosphere mean a greater capacity for heavy rain, flash floods, and widespread damage. 'Very likely this is going to be the future not only for Spain, for all of us in central and southern Europe.'
María José Sanz Sánchez, the scientific director of the Basque Centre for Climate Change (BC3) in Bilbao, warns that 'even the best insurance schemes in the world, like the Spanish one,' may struggle as extreme climate-linked events increase.
Along with the intensity and frequency, the unpredictability of extreme events is growing. Cathal Carr, founder of the reinsurance company OAK Re, says that companies like his would generally look at the previous 50–100 years' worth of data to model risks. This is no longer sufficient.
CCS may also need to change course. It covers agricultural insurance and catastrophic risk insurance. The aim of the latter is to provide a buffer against catastrophes both natural (earthquakes) and human (terrorism). Increasingly, the division between a 'natural' disaster and one caused by humans is becoming blurrier. Over CCS' existence, extreme daily rainfall in September–December in central and southeastern Spain has become twice as likely, and 12% more intense, due to human-caused climate change.
Most CCS claims have been related to floods. CCS stopped covering hail in the 1980s, though it continues to be a threat. A hailstorm affected Valencia around the same time as the floods last autumn. So far, wildfires are not yet included, but could be part of CCS coverage in the future if the damages increase.
When determining what to cover, CCS distinguishes between climate hazards (for example, it does not cover heatwaves) and hydrometeorological hazards (for example, it does cover drought). The consortium's perspective is that these have different implications for insurance. In practice, however, the effects are interlinked, particularly as climate variability intensifies.
Espejo likes to explain the distinction by specifying that private companies 'cover water damages when the water comes from the roof and we cover water damages when the water comes by the door.' In other words, hail damage is covered by the private market, which is free to apply risk-reflective premiums. Crop insurance for droughts falls under CCS' purview.
The 0.15% surcharge will probably need to be raised if extraordinary events increase, Espejo acknowledges. This would mark a change. In the 21st century, the charge has only been lowered (in view of the health of the insurance market).
An even more complex question is whether having a reliable catastrophe insurer discourages individuals and communities from reducing risk in the first place. 'We have to make a choice,' Espejo responds. 'And our choice is to favor the availability and the existence of insurance,' rather than leaving people vulnerable through less affordable or accessible insurance.
Global Fragmentation
While climate-related disasters have led to insurer pullouts in vulnerable areas like California, CCS has ensured a stable base for insurance companies, which continue to be profitable in Spain in spite of its climate exposure. Compared to other European countries, the combined ratio of Spanish insurance is generally much lower (more profitable) and more stable, says Ekaterina Ishchenko, a director at Fitch Ratings, a credit rating agency, in Madrid.
'I think in general it's quite positive for particular countries' insurance sectors to have a scheme like that, but that's of course based on the political will,' Ishchenko comments. In Spain, 'I think that it has demonstrated that it works really well for the sector and for the country.'
France has a similar system, but Germany does not. 'I think Germany is a bit behind on this front,' comments Alberto Messina, a senior director at Fitch Ratings in Frankfurt. 'There's been political discussions again, which obviously usually intensify right after an event occurs, and then perhaps fade away a bit after that.'
Overall, Messina believes, 'The direction of travel is towards the Spain model. And I think the spirit based on which other countries are moving is essentially not to do a favor to the insurers, but to protect businesses and customers, in the sense that it's just cheaper and safer to prevent as opposed to wait for the event to occur and then rebuild from scratch. So I think that's what they're trying to achieve now, in order to build resilience and business continuity and avoid disruptions.'
There are both logistical and ideological reasons that not all countries will adopt a Spain-style model for catastrophe insurance. In some places, people living outside of flood risk zones, for instance, might balk at the idea of paying the same insurance surcharge as people in more vulnerable areas.
Though it may not be palatable everywhere, this goes back to that idea of solidarity that animates CCS. Sanz, the Valencia-born climate scientist, believes that the general principle behind CCS is very much needed in an era of spiralling climate impacts. That is, everyone has to contribute and share the risk.Reporting for this story was supported in part by a press trip organized by the Provincial Council of Bizkaia.