The fundamental success of the Spanish extraordinary risk coverage system lies with the very Insurance Compensation Consortium (CCS), created in 1954 after the merger of different Consortiums to cover contingencies developed to respond to the losses caused by the Civil War and other major incidents that had occurred. At present, the CCS has different policy areas (automobile civil liability, combined agricultural insurance, environmental or nuclear risks, ...), and is stands out particularly for its coverage of extraordinary risks.
The CCS thus constitutes the central figure of a unique catastrophic damage compensation system in the world, based on its compulsory nature, which provides policyholders with coverage against this type of risk through its inclusion in property damage, life, accident and pecuniary loss policies, which policyholders contract freely with any insurer.
This coverage is therefore universal in nature and compensated by the entire insured base, such that it is priced in a way that seeks the overall technical balance for all the risks covered by the system. The amount of the premium corresponding to each policy depends on the type of asset protected and the capital insured by it.
This allows very broad coverage at a very affordable cost, making the system self-sustainable and not requiring any type of contribution from the budgets of any public administration. Until now, the system has been balanced, efficient and adequate before contingencies (some of special intensity and cost), as well as flexible and sufficient to deal with them with solvency. Although the number of compensations has grown significantly in recent years, the system has also grown in the number of policies and has perfectly maintained its balance and financial robustness.
In terms of limitations, CCS requires the need to evaluate the changes that occur as a consequence of climate change in the risks it takes on, and seek solutions that allow us to continue assuming such risks.
To this end, knowing the evolution of climate change hazards (particularly due to flooding and strong winds) to a proper extent and considering possible long-term insurance technical options is necessary, including adjusting premiums or coverage if the situation requires it.
Some risks that can be exacerbated as a consequence of climate change, such as heat waves and pandemics, are currently covered by the insurance sector through life insurance in its ordinary coverage package. If they were to reach a sufficiently high magnitude, the debate about including these risks within the system of extraordinary risks could be raised; for now however, that moment seems distant.
Other limitations refer to the uncertainty and lack of precise models required to perform a correct evaluation and assessment of the risks derivables from climate change that include possible scenarios that allow guaranteeing maximum coverage while maintaining the viability and stability of the model.
Climate change raises before the insurance sector important changes in three fundamental aspects: underwriting, investment strategies and the sector's own environmental policies. Of these three elements, underwriting, which is understood as the process of deciding whether a risk is insurable and under what conditions, is one of the aspects most vulnerable to the phenomenon of climate change within the realm of this insurance market.
Furthermore, the presence of asymmetries in the information between insured and insurer can lead to careless behavior on the part of the insured, generating an exaggerated perception of confidence with respect to the insurance coverage (moral risk) that can generate changes in the severity and probability of events. These behaviors are likely to be exacerbated in the face of extreme weather events.
This asymmetric information problem, associated with the difficulty of identifying high or low exposure risks through pricing, makes taking on insurance an expensive process for insurance companies in general. In the particular case of the CCS, automated coverage and the pooling of risk certainly facilitates the universality and affordability of insurance protection, but does not explicitly promote the adoption of self-protection measures by the insured party. The CCS studies measures that, beyond the dissemination and awareness-raising work performed together with the insurance sector and other institutions, have a positive impact on this type of risk reduction behavior. Also, the CCS will support any measure aimed at reducing exposure and vulnerability to risks via regulation and spatial planning.