The fundamental success of the Spanish system of coverage against extraordinary risks is the Consorcio de Compensación de Seguros (CCS) itself, created in 1954 after the merger of different consortia for the coverage of contingencies, developed to respond to the losses caused by the Civil War and other significant losses that occurred. Currently, the CCS has different areas of action (motor vehicle civil liability, combined agricultural insurance, environmental or nuclear risks, ...), standing out singularly for its coverage of extraordinary risks.
The CCS is thus the central figure of a unique compensation system for catastrophic damage based on its obligatory nature. This system provides policyholders with coverage against this type of risk through its inclusion in policies for damage to property, life, accidents, and pecuniary losses, which policyholders freely contract with any insurer.
This coverage is, therefore, universal in nature, compensated among the entire insured base, and priced to achieve an overall technical balance for all the risks covered by the system. The surcharge amount corresponding to each policy depends on the type of protected asset and the capital insured.
This allows for comprehensive coverage at a very affordable cost, which makes the system self-sustainable and does not require any contribution from the budgets of any public administration. To date, the system has been balanced, efficient and adequate in the face of supervening contingencies (some of particular intensity and cost), being flexible and sufficient to meet them with solvency. Although indemnities have grown significantly in recent years, the system has also grown in the number of policies and has maintained its balance and financial potential.
As a limitation, from the scope of action of the CCS, there is a need to evaluate the changes that occur due to climate change in terms of the risks it assumes, seeking solutions that allow them to continue to be assumed.
To this end, it is necessary to optimally understand the evolution of the hazard due to climate change (in particular due to flooding and strong winds) and consider possible technical insurance options in the long term, including adjustment of surcharges or coverage if the situation requires it.
Some risks that may be exacerbated by climate change, such as heat waves and pandemics, are currently covered by the insurance sector through life insurance in its ordinary coverage. If this magnitude increases sufficiently, the debate of including these risks within the extraordinary risk system could arise, although that moment seems distant for now.
Other limitations refer to the uncertainty and lack of precise models for a correct assessment of the risks derived from climate change, including possible scenarios that guarantee maximum coverage while maintaining the viability and stability of the model.
Climate change poses important changes to the insurance sector in three fundamental aspects: underwriting, investment strategies and the sector's environmental policies. Of these three elements, underwriting understood as the process of deciding whether a risk is insurable and under what conditions, is one of the most vulnerable aspects to the phenomenon of climate change within the framework of this insurance market.
In addition, information asymmetries between the insured and the insurer can lead to careless behaviour on the part of policyholders, exaggerating their confidence in insurance coverage (moral hazard) and causing changes in the severity and probability of claims. These behaviours are likely to be exacerbated in the face of extreme weather events.
This problem of asymmetric information, associated with the difficulty of identifying high or low-exposure risks through pricing, makes underwriting, in general, a costly process for insurance companies. In the particular case of the CCS, the automatic coverage and mutualisation of risk facilitate the universality and affordability of insurance protection. However, it does not explicitly encourage policyholders' adoption of self-protection measures.
The CCS studies measures that, beyond the dissemination and awareness-raising work carried out with the insurance sector and other institutions, impact positively prioritising this type of risk-reducing behaviour. The CCS will also support any measure to reduce exposure and vulnerability to risks, from regulation to territorial planning.