Reinsurance and other Risk Transfer Mechanisms

National Policy on Disaster Management

IRDA,NDMA and FICCI

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11th August 2010

• Disaster Risk financing : Availability of Reinsurance support

• Alternative Risk Transfer : Development of Insurance linked securities,

Insurance linked warranties and CAT bonds for managing risks

• Partnership for risk transfer and financing formation of natural

catastrophe pool

Agenda

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• How should the cover be priced?

• How should the Sum Insured be selected?

• How should the claims be determined and paid?

• Will international reinsurance support be available for such a large scale

cover?

• Will the Government be willing to subsidize the premium and give tax

breaks?

Concerns

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• CAT : Super CAT

• Historical data : not good enough anymore

• Economic losses : Insured losses

• Benefit : Indemnity

• Indemnity based mindset; slow to recognize climate change as a

factor

• Micro : Big Ticket

Challenges

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• Lessons from US and China

• Going beyond physical assets

• Man made : AOG

• ‘Activism’ : Insurance Industry

• Reactive : Proactive

• Solvency of insurers/pools : Risk Based Capital

Challenges

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• The most direct risk to insurers from climate change is that the

probabilities of loss are changing quickly

• Not easy to identify by looking at extreme events themselves, given the

low frequency

• Looking at the global weather scene, noteworthy that great disasters

appear in clusters

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Source : CII (UK)

Implications of Climate change

Great Weather catastrophes 1950-2009

Source:Munich Re

• Chart shows one year in three the costs are 50% higher than the trend

line

• Given this trend, it seems very likely that there will be a ‘peak’ year that

will record costs of over USD 1 trillion before 2040

• With so much development taking place in coastal zones, the figures

may achieve considerably before 2040

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Source : CII (UK)

Implications of Climate change

Way forward

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• How should the cover be priced?

• District wise Average Annual Loss from pre-calculated peril matrices to determine exposure

• Analysis of historical data keeping in mind today's economic value/s

• Greenhouse Factor

• How should the Sum Insured be selected?

• Low insurance penetration and density implies coverage for a few

• Coverage based on benefit, to start with, instead of indemnity. Helps pricing as well

• How should the claims be determined and paid?

• Linkage to UID or Government verification

• Micro insurance model to reach the grass roots

Way forward

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• Will international reinsurance support be available for such a large scale

cover?

• Best practices from other markets can be adopted to suit Indian needs. E.g.-

• Turkish Catastrophic Insurance pool

• FONDEN Of Mexico

• Caribbean Catastrophe Risk Insurance Facility

• The Indonesian Earthquake Reinsurance Pool

• Will the Government be willing to subsidize the premium and give tax

breaks?

• There needs to be legislation, regulations and incentives to ensure that insurance is used to share the burden of disaster relief

Way forward

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• Other steps

• Separate CAT reserve for companies?

• Public Private partnership?

• Consider widening Terrorism pool to cover other perils?

• Cooperation with international reinsurers?

• Regional pooling?

Not a Child’s play!

• Z:\Temp1\simcitysocietiesthedisasterswww.wmv

Thank you