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Disaster Risk FinancingGlobal Approaches

11 August 2010

Reed Bouchelle, New Delhi

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Guy Carpenter

Agenda

Financing disaster risk– California Earthquake Authority (CEA)– Turkey Catastrophe Insurance Pool (TCIP)– Taiwan Residential Earthquake Insurance Fund (TREIF)

Government involvement

Policy details– Pricing– Claims Management

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Goal: To provide you with information

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Guy Carpenter

How does the USA manage cat risk?

Hurricane

Alternative markets for high-risk properties

State-level pools and FAIR plans

Each plan purchases reinsurance

Earthquake

Residential earthquake

California-specific program

CEA purchases reinsurance

Flood

Coverage for residential property

Managed at Federal level

No reinsurance purchased

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Guy Carpenter

Government Disaster Risk SchemesSources of Financing

Source: GC internal study

Survey includes: California, Taiwan, Turkey, Japan, New Zealand, Romania, Norway, Switzerland, Iceland, Mexico

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Guy Carpenter

Case Study: California Earthquake Authority

Covers residential earthquake

2009 claims paying capacity at $9.8 billion (manage to 500 year return period)

– Funds: $3.7b (38%)– Reinsurance/Cat Bonds: $3.1b (32%)– Market Assessments: $2.6b (27%)– Revenue Bonds: $311m (3%)

Policy Structure– Deductible at 10% or 15% of insured value– Base policy covers building only. Contents

coverage offered separately

Distribution– Mandatory offering through member insurers– Purchase not required

Sources: GC Los Angeles, CEA websiteIn

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city

$9.763b

Reinsurance & Cat Bond

Revenue Bond

Industry Assessment

Capital

$3.7b

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Guy Carpenter

Case Study: Turkey Catastrophe Insurance Pool

Covers residential earthquake

Claims paying capacity to absorb 1 in 200 yr event– Reinsurance: 92%

Includes structured solutions and private placements

– Capital Markets: 8%

Policy Structure– Max coverage is TL 40B (about $30k)– 2% deduction applied over the sum insured

Distribution– Compulsory purchase by residential property owners

through private insurers

€1.5b

Reinsurance

Structured Solution

Reinsurance

Reinsurance

Capital Market Solution

Structured Solution

Reinsurance

Retention

€175m

Source: GC London

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Guy Carpenter

Case Study: Taiwan Residential Earthquake Insurance Fund

Sources: GC Hong Kong, TREIF Website

TWD 70bn

TWD 2.8bn

Covers residential earthquake

Claims paying capacity – TWD $70 billion (manage to 1 in 400 yr return)

Risk Financing Structure– Industry coinsurance (29%)– TREIF Fund (35%)– Reinsurance (21%)– Government (15%)

Policy Structure– Sum insured of TWD 1.2mn + 180k living expenses– Loss must exceed 50% of replacement cost

Distribution– Through member insurance companies– Not compulsory, but mortgage lenders require it

TREIF Fund

Reinsurance

Government

Coinsurance

TREIF Fund

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Guy Carpenter

Government Involvement

Guarantee claims payment (France, Spain, Iceland)– France: CCR acts as state-backed guarantor of NAT CAT funds– Spain: Fund has permanent state guarantee, which has never been

invoked– Iceland: If assets and reinsurance cannot cover claims made, the Board

may take a loan and the State Treasury guarantees such loans by means of surety

Provide direct funds for claims paying capacity (TREIF, JER)

Provide Tax Breaks (TCIP, JER)– TCIP and its revenues are exempt from all taxes, levies and charges.

Accumulation funds are kept in segregated accounts. – JER: Government provides tax relief on household earthquake premiums

for up to JPY 50,000 a year (national income tax law) or up to JPY 25,000 (local)

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Guy Carpenter

Policy Pricing

Two Categories:– Exposure-Based Pricing

Location (Zones) Construction type Age of building

– Fixed Pricing Set amount Set percent

- Building type- Fire premium

Exposure-Based Fixed

USA

Japan

Germany

Turkey

Mexico

Iceland

Norway

France

Spain

Switzerland

Taiwan

New Zealand

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Guy Carpenter

Policy Pricing – Exposure Based Pricing Examples

California– Policy premiums determined using computer models with data based on

Policyholder’s location and proximity to earthquake faults and soil conditions (zip code)

Type of construction (material, foundation, age and number of stories Discounts applied if property meets specific earthquake mitigation

standards

Japan– Divided into four basic zones and buildings are divided between wooden and

non-wooden construction– Discounts are applied depending on age of construction (built before 1981),

or certified for earthquake resistance

Turkey Types of building Zone I rate (‰)

Zone II rate (‰)

Zone III rate (‰)

Zone IV rate (‰)

Zone V rate (‰)

Steel, reinforced concrete

2.20 1.55 0.83 0.55 0.44

Masonry buildings 3.85 2.75 1.43 0.60 0.50

Others 5.50 3.53 1.76 0.78 0.58

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Guy Carpenter

Policy Pricing – Fixed Based Pricing Examples

Iceland – Single premium of 0.25 per thousand premium for building and contents

0.20 per thousand premium for infrastructures

France– Compulsory surcharge on all fire/motor policies

Property other than vehicles: 12% of the fire premium Cars and other vehicles: 6% of the fire and theft premium (or 0.5% of the

premium for material damage)

Spain– Rates per thousand of Sum Insured

.08 for residential property .21 for industrial risks

TREIF– Flat rate of TWD 1,350 regardless of building construction or location

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Guy Carpenter

Claims Management

Claims payout procedures differ by pool:– JER uses staggered claims payout

approach depending on damage level– TCIP’s claims assessment based on

replacement cost of each type of building. Loss payment is limited to sum insured.

– TREIF loss triggers based on actual total loss or constructive total loss (when repair cost of damage is more than 50% of the replacement cost of the building)

Losses can be handled by the member insurance companies according to their normal claims handling procedures (CEA, France, Switzerland, JER)

Some pools employ their own loss adjusters/claims staff and handle claims directly, often depending on size of event (TREIF, Iceland, TCIP)

Extent of damage Percentage payable

Buildings

Damage exceeds 50% of the sum insured or 70% of the floor area 100

Damage between 20% and 50% of the sum insured or between 20% and 70% of the floor area

50

Damage between 3% and 20% of the sum insured 5

Contents

Damage exceeds 80% of the sum insured 100

Damage between 30% and 80% of the sum insured 50

Damage between 10% and 30% of the sum insured 5

Percentage payable

Buildings

100

50

5

Contents

100

50

5

JER Payout Structure

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Guy Carpenter

Conclusion

Let’s review your initial questions…

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How should the cover be priced?

How should the Sum Insured be selected?

How should claims be determined and paid?

Will international reinsurance support be available?

Will the government be willing to subsidize premium and give tax breaks?

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