Comparing the protection offered by different insurance · 2016. 5. 18. · CONFIDENTIAL ©2016 AIR...

1CONFIDENTIAL ©2016 AIR WORLDWIDE

Comparing the protection

offered by different insurance

pools worldwide

Greg Talbot

Business Development Manager


- Insure the World

- Natural Catastrophe Pools

- Analysis

Agenda


Insure the World


AIR’s Models Cover Much of the Insured World but Economic Losses Are Much Higher

Economic AAL ~$307bnInsured AAL ~$74bn


Reinsurance Capacity is Currently Large Enough to Cover the Currently Insured World

AIR’s Modelled Aggregate Insured Loss:• 250-year ~ USD 305bn

• 1,000-year ~ USD 400bn

“Reinsurance Capital” = USD 565bn*

“Global Property Cat Reinsurance Capacity” = USD 400bn**

“Dedicated Global Reinsurance Capital” = USD 425bn***

Sources: * AonBenfield Q1 2016

** Guy Carpenter July 2015

*** Willis Re mid-range Sept. 2015


But How Much Would it Cost to “Insure the World” if All of it Were Insured?

0

200

400

600

800

1.000

1.200

1.400

1.600

AAL 520%

1010%

205%

502%

1001%

2000.5%

2500.4%

5000.2%

Lo

sses

(US

D B

illi

on

s)

Return Period Exceedance Probability

Occurrence

Aggregate

Layer from 1% GDP to 1.5% GDP

Premium ~$8.2bn ???

Attachment Prob.

1.62%

Exhaustion Prob.

0.43%


Is there the expectation that the Government will fill the gap?


Role of U.S. Federal Government in Covering Disaster Losses(proportion of total loss paid by taxpayers)


Natural Catastrophe Pools


What’s in a name?

Sometimes called Natural Catastrophe ((Re)Insurance) Pools/Schemes…

However their goal is universal:

- To guarantee affordable and stable insurance premiums to a broader

mass of people

- To provide immediate post-disaster financing proportionate to the

incurred loss


What is the Problem?

• Some countries are heavily exposed to natural disasters (Windstorm, Earthquake, etc.)

• Their limited size and borrowing capacity restrict their resilience to disasters

• Heavy dependence on post disaster financing and aid from international donors

• Access to insurance is limited due to size of placement and high transaction costs

• Lack of historical information on intensity of natural disasters in some regions (Pacific & Indian Ocean)


Concepts of Risk Pooling – Technical Insurance Premium

Annual Expected Loss Annual Expected Loss

Operating CostsOperating Costs

Cost of Capital

(reserves and risk

transfer)

Cost of Capital

(reserves and risk

transfer)

Underlying risk

unchanged

Economies of

scale e.g. fixed

costs

1 - Lower R/I costs due

to better structured and

diversified portfolio

2 -Joint reserves to

retain 1st aggregate

loss

BEFORE AFTER


The Value Proposition

• Pooling risks across a wide area provides better spread and more efficient use of capital

• Pools create the spread of risk and critical mass to make catastrophic risk insurance affordable

and effective

- Would making insurance compulsory avoid anti-selection and overcome a lack of risk awareness?

• Provide a more efficient platform to transfer catastrophic risk to international reinsurance or

capital markets (e.g. PAID, TCIP, TREIP, EQC)

• Provides a mechanism to encourage risk mitigation and safer construction practices

• Provides the platform to increase risk awareness

• Facilitates the build up catastrophe reserves

• Facilitates research and investment in the modelling of catastrophe risk


Recent Press Coverage of Natural Catastrophe Pools

Reactions, 26th April 2016

Business Mirror, 30th April 2016

April 14th 2016

Artemis, 2nd May 2016


Countries with Active Nat Cat Schemes


Focus of Today

EQC – New

Zealand

PAID – Romania

TCIP – Turkey

TREIP - Taiwan


EQC

Rūaumoko – God of EQ,

Volcanoes and seasons

Set up in 1945 in response to the Wairarapa EQ in 1944

EQC Act 1993 has 4 roles:

- i) Manage the Natural Disaster Fund

- ii) Educate about disaster preparedness

- iii) Conduct research into detection and understanding of geological hazards

- iv) Settle claims

If a homeowner has home and contents cover, they automatically

have EQCover

EQC usually pays the first NZ$ 100k for a home and up to NZ$ 20k

for contents (land damage is also covered)

Damage above this will be paid by a private insurer


TCIP – “Earthquake will pass and life will go on”

Founded in 2000 after the 1999 Izmit Earthquake.

In 1999 there was only about 2% EQ penetration outside of Istanbul

Maximum sum insured of TL 150k

Commercial and Industrial buildings

require private insurance


TCIP – “Earthquake will pass and life will go on”

Key difference is that premium for Compulsory Earthquake Insurance (CEI) is Tariff based:


PAID

Established in 2009, as a joint effort of 12 insurance companies

Perils covered are earthquake, floods and landslides

Goals include: to provide a product that is simple and accessible to all homeowners

To insure prompt payment in the event of a catastrophic loss

Build a solid financial reserve to protect against natural phenomena

To promote education and improve protection measures

20 EUR premium/20,000 EUR sum insured for wood, concrete and brick houses

10 EUR premium/10,000 EUR sum insured for adobe houses

Unlike other pools, PAID was established pre-event


PAD vs. Facultative Policies

-

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

1.600.000

1.800.000

Total policies in force

Source: paidromania.ro


TREIP

The TREIP (Taiwan Residential Earthquake Insurance Program) was established in

2002 following the 1999 Chi-chi Earthquake

Prior to the Chi-chi EQ (economic loss of $12bn) fewer than 1% of residents were insured

The pool was designed to diversify risk through local co-insurance, a non-profit fund, reinsurance

and Government funds

New residential fire policies are issued on an annual basis to automatically cover earthquake risk

A maximum insured of TWD$1.2m (US$37,730), with TWD$180k (US$5.5k) for living expenses.

The annual flat premium per household is TWD$1,459 (US$46)

Event trigger has to be Total Loss or Constructive Total Loss

Take-up of about 30%


Comparison of four countries

New Zealand

Population – 4.6m

Area – 103,000sq

mi

Romania

Population – 19.5m

Area – 92,000 sq mi

Taiwan



Turkey



Residential

Residential


EQ Pool Comparison

Country Coverage Limit

Amount

Deductible Premium

PAID Buildings €20k/€10k First loss €20/€10

TCIP Buildings €45K 2% Variable

TREIP Buildings,

contents,

living

expenses

€32K/€5K Co-insurance

Pool

€39

EQC Buildings,

Contents,

land

€60k/€12k First loss Included with

other policy


Analysis


EQ Pools were run in our software

Using AIR software, we ran our Industry Exposure database for each country and each EQ pool,

in the same currency €…

The results shown are Aggregate losses, i.e. they are the sum of all losses in the year (as

opposed to Occurrence losses, which just show the highest loss in any year)

A reminder that the return periods shown correspond to Exceedance Probabilities, so for

example a 100 year return period corresponds to a 1% chance of exceeding this level of loss.

Other key return periods: 200 years = 0.5%

250 years = 0.4%

500 years = 0.2%


Country Comparison – EQ only – All LOB

0

10.000

20.000

30.000

40.000

50.000

AAL 10yrs

25yrs

50yrs

100yrs

200yrs

250yrs

500yrs

EUR (M)

Return Period

Country Comparison EQ Only - All LOB

Romania

NZ

Taiwan

Turkey


Country Comparison – EQ only – Residential Only

0

5.000

10.000

15.000

20.000

25.000

AAL 10yrs

25yrs

50yrs

100yrs

200yrs

250yrs

500yrs

EUR (M)

Return Period

Country Comparison EQ Only -Residential Only

Romania

NZ

Taiwan

Turkey40%

45%

50%

55%

60%

65%

70%

75%

80%

AAL 10 yrs 25 yrs 50 yrs 100yrs

200yrs

250yrs

500yrs

Return Period

Proportion of Residential losses to all LOB

Romania

NZ

Taiwan

Turkey


EQ Pool Losses

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

AAL 10yrs

25yrs

50yrs

100yrs

200yrs

250yrs

500yrs

EUR (M)

Return Period

EQ Pool Losses

Romania

NZ

Taiwan

Turkey


Losses Net of EQ Pool

0

2.000

4.000

6.000

8.000

10.000

12.000

AAL 10yrs

25yrs

50yrs

100yrs

200yrs

250yrs

500yrs

EUR (M)

Return Period

Losses Net of EQ Pool

Romania

NZ

Taiwan

Turkey


Percentage of Losses taken by EQ Pool

0%

20%

40%

60%

80%

100%

AAL 10 yrs 25 yrs 50 yrs 100yrs

200yrs

250yrs

500yrs

Return Period

Percentage of Losses Taken by the Pool

Romania

NZ

Taiwan

Turkey

Comparing the protection offered by different insurance · 2016. 5. 18. · CONFIDENTIAL ©2016 AIR...

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Transcript of Comparing the protection offered by different insurance · 2016. 5. 18. · CONFIDENTIAL ©2016 AIR...