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Transcript of © 2003, The Tokio Marine Management, Inc. All rights reserved. Government as...
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Government as Reinsurers-of-Last-Resort: The Japanese Experience
June 2003Yuichi Takeda
Tokio Marine Management, Inc
Prepared forThe World Bank Conference
“Financing the Risks of Natural Disasters”
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Japanese awareness of a disaster
Source: Library of the Earthquake Research Institute, University of Tokyo
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Japanese Earthquake Insurance (JEI)
• Established 1966
• For dwelling risk only– Attached with fire policy as a special contract– Covers fire, destruction, burying or washing-away following earthquak
e, volcanic eruption, or tsunami following the two perils– Commercial EQ risk and Private/Commercial Wind risks are covered by
private insurance policy
• Sponsored by Japanese government and property & casualty insurers
• PML estimate with a 250-500 return-year loss– Based on scientific studies of 375 historical
major earthquakes in the last 500 years. (from late 15th century to date)
© 2003, The Tokio Marine Management, Inc. All rights reserved.
JEI - Background
• A strong political leadership created JEI, triggered by a large earthquake in Niigata-city in 1964.
• A public-private partnership form was chosen to create JEI, among other plans.
• Two strategic goals to facilitate…- Affordability of earthquake insurance- Disaster recovery process
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Japanese Earthquake Insurance (JEI) - at a Glance 2002
• Total Per-Event Capacity $37.5bil (Government $31.3bil) (Private $ 6.2bil)
• Gross Premium $850mil*• Total Sum Insured $48bil**• Reserve Balance $12.1bil
(Government $ 6.6bil) (Private $ 5.5bil)
• Maximum Payout in history $653mil(Kobe earthquake in 1995)
All the numbers converted into US$ by 120\/$ * round numbers ** presenter estimate
© 2003, The Tokio Marine Management, Inc. All rights reserved.
JEI - Business Development
Development of Ownership of Household EQ Insurance
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
No. of Policies ('000) Household Subscription Rate
1995Kobe Earthquake
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Total Reinsurance Limit per Event
2.30.3
2.80.5 5.6
1.0
8.5
1.5
8.5
1.5
10.6
1.9
10.6
1.9
12.7
2.3
22.4
3.4
22.4
3.4
26.6
4.2
29.1
5.1
31.3
6.2
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
1966.6 1972.5 1975.4 1978.4 1980.7 1982.4 1991.4 1994.6 1995.10 1996.1 1997.4 1999.4 2002.4
Growth of Per Event Limit - Partnership between Government and Private Sectors
Private Insurers' Liability ($Bil)
Government's Liability ($Bil)
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Total Liability Shared betweenGovernment and Private Insurers
90%
10%
85%
15%
85%
15%
85%
15%
85%
15%
85%
15%
85%
15%
85%
15%
87%
13%
87%
13%
86%
14%
85%
15%
83%
17%
75%
80%
85%
90%
95%
100%
1966.6 1972.5 1975.4 1978.4 1980.7 1982.4 1991.4 1994.6 1995.10 1996.1 1997.4 1999.4 2002.4
Shares of Per Event Limit - Partnership between Government and Private Insurers
Government's Share Private Share
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Maximum Coverage Limit per Policy
9060 150120 240
150240150
1,000
500
1,000
500
1,000
500
1,000
500
1,000
500
5,000
1,000
5,000
1,000
5,000
1,000
5,000
1,000
-
1,000
2,000
3,000
4,000
5,000
6,000
1966.6 1972.5 1975.4 1978.4 1980.7 1982.4 1991.4 1994.6 1995.10 1996.1 1997.4 1999.4 2002.4
- EQ Insurance obtained only as an endowsement of personal fire policy- EQ coverage limit is set between 30%-50% of fire limit
House ( \ 0, 000) Contents ( \ 0, 000)
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Rating and Reinsurance
• Non-life Insurance Rating Organization of Japan (NLIRO) performs risk analysis and files rating plans of JEI.
• Japan EQ Reinsurance Company (JER), established by private insurers, manages the reinsurance process sitting in between Japanese government and private insurers
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Role of JER
PolicyholderPrimary Insurers
JER
Reinsurance Contract (B)
Japanese Government
JEQR
Reinsurance Contract (A)
Reinsurance Contract (B)
Reinsurance Contract (C)
Source: Japan Earthquake Reinsurance
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Current Risk Tower (per Event)
Japanese Government
Primary Insurers
JER
$37.5bil
$23.2bil
$ 9.0bil
$ 5.3bil
$ 0.6bil
50% 50%
95%
Numbers are originally determined in yen, converted by $=\120 for presentation purpose
A PML Scenario: A recurrence of Great Kanto EQ (1923) or similar around Tokyo Bay region in a windy winter evening…
© 2003, The Tokio Marine Management, Inc. All rights reserved.
How much capacity is enough?
• A quick guessestimate of Japan’s top risk (Tokyo-Chiba-Kanagawa known as Zone #5)
– Total regional GPP*: about $1,100bil* GPP: Gross Prefectural Product
– Kobe experience: assume a 3% of regional GPP likely to be lost as an EQI claim payment
– Claim estimate: $1,100bil x 3% = $33bil < $37.5bil of total JEI per event capacity
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Does current risk sharing make sense?
• A quick comparison between JEI’s reserve balance and its per event limit suggests the system still has many years to go…
• Private insurers have accumulated their reserve much faster preparing for more frequent events, while Japanese government takes more extreme risks…
Public Private
Per Event Limit $31.3bil $6.2bil
Reserve Balance $6.6bil $5.5bil
© 2003, The Tokio Marine Management, Inc. All rights reserved.
What if “unexpected” happens?
• EQI law stipulates “Pro rata claim payment reduction”
• In case of liquidity crunch of the reinsurance system, EQI special accounts law allows contingent financings from– Government’s general accounts
– Government borrowing
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Rating plans – continuous improvement
Base Rates(Basis Points)
Non-WoodenHouses
WoodenHouses
Area 1 5.0 bps 12.0
Area 2 7.0 16.5
Area 3 13.5 23.5
Area 4 17.5 35.5
Rating Zones
Area 1
Area 2
Area 3
Area 4
Discounts (Choice of A or B)
A. Building Year - 10% discount of build on and after 6/1981
B. EQ Resistance Quality Class - 10% to 30% discount for the three classes inspected and certified according to residential building performance evaluation system (effective 2000)
Revisions of Building Standard Law (1998) and Introduction of Housing Quality Assurance Law (1999) enabled new rating plan effective 2001.
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Claim Payment
Three levels of claim payments are stipulated…
Damage Levels Claim Payments(% of Insured Amount)
Building and/or Contents
Total Loss 100%
Half Loss 50%
Partial Loss 5%
Main Building Structure
Floor Area Contents
Total Loss ≥50% of Building MV ≥70% of total floor ≥80% of Building MV
Half Loss ≥20% or <50% of Building MV
≥20% or <70% of total floor
≥30% or <80% of contents MV
Partial Loss ≥3% or <20% of Building MV
N.A. ≥10% or <30% of contents MV
Level of loss is defined as clear as possible…
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Making the pool working…
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0 50 100 150 200 250 300 350 400 450
Gross Prefectual Income (1999): $bil (120yen/$)
Household EQ Ins.Subsciption Rate (2002)
Tokyo
Osaka
Kanagaw a(Yokohama)
Aichi(Nagoya)
Chiba
Shizuoka
Saitama
Hyogo(Kobe)
KyotoTokushima
Hokkaido
Fukuoka(Hakata)
Hiroshima
Subscription Rates Risenfrom mere 3% to 12.4% AfterKobe EQ
Observed Relationship between Household Income and EQI Subscription
Higher subscription
Higher income levels
Risk awareness & motivation to
subscribe
© 2003, The Tokio Marine Management, Inc. All rights reserved.
The Japanese Experience
What are the key lessons learned?
What are the challenges?
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Start early so that you can prepare
Source: Library of the Earthquake Research Institute, University of Tokyo
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Leadership makes a difference
Source: Library of the Earthquake Research Institute, University of Tokyo
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Public-private partnership
Source: Library of the Earthquake Research Institute, University of Tokyo
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Simple product provides comfort
Source: Library of the Earthquake Research Institute, University of Tokyo
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Reality and management of risk sharing
Source: Library of the Earthquake Research Institute, University of Tokyo
© 2003, The Tokio Marine Management, Inc. All rights reserved.
Continuous improvement required
Source: Museum of Institute for Fire Safety and Disaster Preparedness