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www.guycarp.com
Disaster Risk FinancingGlobal Approaches
11 August 2010
Reed Bouchelle, New Delhi
2
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
3
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
4
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
clu
de
s C
at
Bo
nd
ca
pa
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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