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INSURANCE| 12.04.2022

The Insurance Compensation Consortium, the body that shoulders the burden for everything excluded by insurance

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What if no insurance company wants to cover your car? What if your house is buried by a volcano, as we have seen recently in La Palma? There is a figure that is in charge of insuring and covering what insurance, by definition, does not cover. This is the Insurance Compensation Consortium (CCS), a unique institution that many people have never heard of, except on rare occasions, such as when an earthquake occurs, for example.

However, whenever an insurance policy is taken out, a very small part of the cost of the policy goes to this institution so that in the event any claims arise that are encompassed in its mission, the insured parties will receive compensation. Of course, if you are not insured, do not expect the Consortium to be a charity that covers everything when a disaster occurs

This institution is the ultimate form of mutualizing risk. If it did not exist, actuarial calculations would say that because the probability of suffering an earthquake, for example, in an area of high seismic risk is infinitely higher than in an area without such risk. So, any home insurance, for example, in that area would have a cost that, in all likelihood, many people would not be able to afford. Risks, then, are mutualized… and it is done in a simple way: a percentage of the cost of home, automobile or industrial risk insurance goes to the CCS. This very small amount, a percentage that can range from 0.003% in life and accident insurance to 1.63% in marina damage coverage, ensuring that when the CCS has to act, it has the resources to be able to compensate for all these damages. With these amounts, which we do not even notice in our policy, the capital insured by the CCS is immense: 3 trillion euros in homes and communities, almost 500 billion euros in businesses and 9 trillion euros in damages to individuals.

What’s more, you probably didn’t even know that. Neither you nor most policyholders are aware of this. But when you take out a policy with an insurance company, you enter into two different contracts: one with the insurer and the other with the CCS.

What is the scope of action of the CCS?

First, it acts like were any other insurer in the event that at least two insurers do not want to insure you for a risk that you are obligated to insure. The clearest example is automobile insurance. Spanish law requires all vehicles to have liability insurance against damage they may cause to a third party. However, a private company is not obliged to provide insurance to everyone who asks for it. In this case, the CCS can be called upon, which is mandated to insure this risk. The way it operates is like any other insurance company: it issues a policy and charges a premium.

Extraordinary claims

Second scenario: compensation for extraordinary claims not covered by insurance companies. We are speaking of an earthquake or flooding, for example. The insurers exclude these risks in their contracts, but if they occur and the insurance payment is up to date and the established requirements are met, the CCS will be responsible for the indemnification.

The CCS covers three types of extraordinary risks: natural phenomena, those caused by violence and those arising from the actions of the Armed Forces. Phenomena caused by violence refers to acts derived from terrorism, rebellion, riot, or civil commotion. Fortunately, at present, few claims fall under this heading.

Incidents caused by the Armed Forces or security forces must always be extraordinary occurrences in peace time. There are also very few such cases in the activity of the CCS.

Logically, losses caused by nature are the most significant and also account for the largest number of cases and claims. Those caused by water, whether flooding or river overflows, for example, are the most numerous. However, losses caused by earthquakes, tsunamis, volcanoes, hurricane winds – exceeding 120 km/hour – tornadoes or even meteorite falls are also covered.

Climate change is causing losses that were not previously included among those for which the CCS was responsible, such as heavy snowfalls. Remember Filomena, in 2021, which left half the country snowed in. That can certainly be qualified as an extraordinary incident… or would anyone say that it was an ordinary snowfall? In this case, the CCS was not expected to assume responsibility for these indemnifications, and it was the insurance companies that assumed this cost. Perhaps, what used to be extraordinary losses are beginning to become ordinary, as a consequence of climate change, and it may be time to analyze other losses that previously did not fall within the scope of this institution.

Perhaps we will see a change similar to the one experienced when the CCS joined the Spanish Environmental Risk Pool. Naturally, environmental awareness has awakened a great deal since the creation of this body. Since then, the risks and the possibility of accidental contamination of the environment have also increased, as has the need and obligation to repair the consequences of such contamination.

Other functions

The CCS also acts as a guarantee fund in certain cases, such as to indemnify in the event that an uninsured vehicle causes an accident, causing damage to persons or objects, or a stolen vehicle -even if insured-.

The CCS is also the manager of the information file of insured vehicles (FIVA), which allows, knowing the license plate of a vehicle, which is the insurer and, therefore, which company to apply for compensation in the event of an accident between two vehicles. It is also responsible for informing European countries about insurers of Spanish vehicles involved in accidents outside Spain and, conversely, for requesting information about foreign vehicles involved in accidents in Spain.

It also performs other functions which, albeit more administrative in nature, are also important. Namely, the liquidation of insurance companies. What does this mean? When an insurer goes into receivership or bankruptcy, it is the CCS that manages and administers these entities in such proceedings. Fortunately, the Spanish insurance industry is in good health, and this is not the primary function of this body.

An institution with over 80 years of history

Although it is little known, the institution is not a recent creation. Today it is part of the Ministry of Economy and Competitiveness, but its origins date back to 1941. It was then that the Mutiny Risk Compensation Consortium was created after the Spanish Civil War and covered some of the most important incidents that occurred in the 1940s: fires in Santander, Canfrac (Huesca) or El Ferrol (La Coruña), the explosion of the Navy powder magazine in Cádiz in 1947 or the explosion of the powder magazine in Alcalá de Henares (Madrid), one year later. It was in 1954 when the foundations of what is today the CCS were laid. It was established on a permanent basis and with practically unchanged functions, until the closing years of the 20th century, when it became part of the Spanish Pool of Environmental Risks, extending its area of activity to environmental civil liability, or in 2002 when it incorporated the aforementioned functions of liquidation of insurance companies.

How is the CCS financed?

Its income comes primarily from the premiums paid by the owners of vehicles insured by the institution. Second, surcharges on insurance policies, i.e., the portion of the premium paid when taking out home, commercial or automobile insurance, for example, that goes to the CCS. And finally, the returns obtained through its investments, since in this area it acts as an insurance company, investing in and buying representative, top-quality real estate assets, which it uses mainly to rent to institutional clients.