Italy sets out the legal framework for compulsory Nat Cat insurance

On 27 February 2025, the decree of the Ministry of Economy and Finance no. 18 of 30 January 2025, setting out the regulation containing implementation and operational methods for catastrophic risk insurance schemes pursuant to article 1, paragraph 105, of Law no. 213 of 30 December 2023 (the "2024 Italian Budget Law") - also known as catastrophe policies or Nat-Cat policies – was published in the Italian official Gazette (the "Decree").

The aforementioned 2024 Italian Budget Law - as subsequently amended by Decree-Law no. 202 of 27 December 2024, converted, with amendments, by Law no. 15 of 21 February 2025 - introduced the obligation for companies registered within the Italian Register of Enterprises (excluding those exercising agricultural business) to take out – within 31 March 2025 – an insurance policy aimed at covering damages occurring to the lands, buildings, plants, machineries, as well as industrial and commercial equipment, where such damages are due to natural disasters and catastrophic events (i.e. earthquakes, floods, landslides and overflows) occurred in the Italian territory. The scope of application of these provisions also includes enterprises incorporated abroad with a branch in Italy subject to registration requirements. As for insurers, the refusal or evasion of the obligation to accept said risks, including in the event of policy renewals, may be sanctioned by IVASS with an administrative fine.

In this context, the Minister of the Economy and Finance and the Minister of Enterprise and Made in Italy has set out by decree additional implementation and operational methods for the insurance schemes, including the methods for identifying disastrous and catastrophic events eligible for compensation, as well as the determination and periodic adjustment of premiums.

In this regard, the Decree provides, among other things, the following:

• Concerned insurance companies: insurers obliged under the Decree are those authorized to operate in Italy in Class 8 (Fire and natural forces) as per article 2, paragraph 3, of the Italian Insurance Code, including foreign insurers operating under right of establishment or freedom to provide services and enrolled in the registers and lists kept by IVASS, which carry out the activity of underwriting insurance contracts, at an individual or group level, to cover damage to the aforementioned assets;
• Determination and periodic adjustment of premiums: the premium shall be determined in proportion to the risk insured, also taking into account the location of the risk in the territory and the vulnerability of the insured assets, based on the historical series currently available, the hazard or risk maps of the territory available and the relevant scientific literature, and adopting, where applicable, predictive models that take into due consideration the evolution over time of the probability of events occurring and the vulnerability of the insured assets. Account is also taken, in proportion to the consequent reduction of risk, of the measures adopted by the insured company, also through collective organizations to which it belongs, if any, to prevent risks and protect the covered assets from natural disasters and catastrophic events. Premiums shall be updated periodically, also in consideration of the principle of mutuality, in order to reflect the evolution of economic values and of knowledge and risk modeling, taking into account the risks of anti-selection and the solvency objectives of the insurance company;
• Exclusions: the insurance policy stipulated in accordance with the Decree shall not cover: a) damage that is the direct consequence of active human behavior or damage to third parties caused by the insured goods as a result of events; b) damage as a direct or indirect consequence of acts of armed conflict, terrorism, sabotage, riots; c) damage related to nuclear energy, weapons, radioactive, explosive or chemical substances or resulting from pollution or contamination;
• Risk assumption capacity of insurance companies: in order to fulfill their obligation to contract, Italian insurance companies shall define - within the risk management system and the risk appetite defined by the administrative body - with reference to the overall risks to be assumed with the insurance contracts at issue, their propensity to risk in line with the overall solvency requirements of the same, establishing the relative risk tolerance limits. The risk tolerance limits shall be updated at least annually and be defined with reference to the entire portfolio acquired on these risks, taking into account the use of risk transfer mechanisms, including the risk coverage provided by SACE S.p.A (see below for further information). Companies that exceed the risk tolerance limit shall cease to assume additional risks throughout Italy. IVASS and third parties shall be immediately informed of this circumstance by publication on the company's website. These rules apply, in accordance with the provisions of the respective national regulations, also to EU insurance companies authorized to operate in Italy in Class 8 and operating under the right of establishment or freedom to provide services; if such companies intend to cease their activity because they have exceeded the risk tolerance limit, they must immediately inform IVASS and the supervisory authority of their home Country and third parties by publishing this information on the company's website;
• Deductibles: where the sum insured is up to EUR 30 million, the insurance policies may provide, if agreed by the parties, for a deductible, which remains at the expense of the insured, not exceeding 15 percent of the indemnifiable damage. For insured sums exceeding EUR 30 million and for large companies (i.e. companies that, on the closing date of the financial statements, jointly have a turnover greater than EUR 150 million and a number of employees equal to or greater than 500, hereafter "Large Companies"), the determination of the percentage of compensable damage that remains the responsibility of the insured party is freely negotiable between the parties;
• Maximum compensation limits: insurance policies may provide for the application of maximum compensation limits which, where agreed by the parties, shall comply with the following principles:

a) for the range up to EUR 1 million of insured sum, a compensation limit equal to the insured sum shall be applied;

b) for the range from EUR 1 million to EUR 30 million of insured sum, a compensation limit of not less than 70 percent of the insured sum shall apply;

c) for the range exceeding EUR 30 million of insured sum or for Large Companies, the determination of ceilings or compensation limits is left to the free negotiation of the parties.

• Transparency of insurance offers: in order to guarantee transparency and competitiveness of insurance services, as well as adequate information for companies that must fulfill the Nat-Cat insurance obligation, insurers shall publish the related pre-contractual documents and insurance terms and conditions on their websites, in accordance with the applicable IVASS regulations.

Reinsurance by SACE S.p.A.

In addition to the above, in order to contribute to the effective management of the portfolio managed by insurance companies to cover the abovementioned damages, the company SACE S.p.A. (the Italian export credit agency directly controlled by the Ministry of Economy and Finance, hereafter "SACE") was authorized under the 2024 Italian Budget Law to grant, at market conditions, in favor of private insurers and reinsurers, through a specific agreement, coverage of up to 50 percent of the indemnities to which they are liable in the event of damage as defined in the contract, and in any case not exceeding for each of the years 2025 and 2026 the greater of EUR 5,000 million and the free resources, as of 31 December of the immediately preceding year, not used for the payment of compensation in the reference year and available in the accounts of the special section of the related fund of the Ministry of Economy and Finance. For SACE obligations deriving from such coverage, the State guarantee is granted by right upon first demand and without recourse.

SACE has therefore submitted for the approval of the Minister of Economy and Finance and the Minister of Enterprise and of the Made in Italy the draft agreement drawn up following discussions with the National Association of Insurance Companies (ANIA) and in agreement with it, containing the general conditions, the special conditions and the technical annex with which the insurance companies participating in the agreement shall comply in order to obtain the aforementioned guarantee. Such agreement was approved by means of the Decree and is attached to the same under Annex A.

Insurance or reinsurance companies that intend to take advantage of the above coverage can join the scheme within 29 May 2025.

Authored by Silvia Lolli and Davide Valloni.