11 August 2010
Disaster Risk Financing
Global Approaches
Reed Bouchelle, New Delhi
www.guycarp.com
Agenda
1
Financing disaster risk
– California Earthquake Authority (CEA)
– Turkey Catastrophe Insurance Pool (TCIP)
– Taiwan Residential Earthquake Insurance Fund (TREIF)
2
3
Government involvement
Policy details
– Pricing
– Claims Management
Goal: To provide you with information
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1
How does the USA manage cat risk?
Flood
Coverage for residential
property
Managed at Federal level
No reinsurance purchased
Earthquake
Hurricane
Residential earthquake
Alternative markets for highrisk properties
California-specific
program
CEA purchases
reinsurance
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State-level pools and FAIR
plans
Each plan purchases
reinsurance
2
Government Disaster Risk Schemes
Sources of Financing
Source: GC internal study
Survey includes: California, Taiwan, Turkey, Japan, New Zealand, Romania, Norway, Switzerland, Iceland, Mexico
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3
Case Study: California Earthquake Authority
$9.763b
 Covers residential earthquake
Industry Assessment
 2009 claims paying capacity at $9.8 billion (manage
 Policy Structure
– Deductible at 10% or 15% of insured value
– Base policy covers building only. Contents
Revenue Bond
Includes Cat
Bond capacity
to 500 year return period)
– Funds: $3.7b (38%)
– Reinsurance/Cat Bonds: $3.1b (32%)
– Market Assessments: $2.6b (27%)
– Revenue Bonds: $311m (3%)
Reinsurance & Cat Bond
$3.7b
coverage offered separately
 Distribution
Capital
– Mandatory offering through member insurers
– Purchase not required
Sources: GC Los Angeles, CEA website
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Case Study: Turkey Catastrophe Insurance Pool
€1.5b
 Covers residential earthquake
Reinsurance
 Claims paying capacity to absorb 1 in 200 yr event
– Reinsurance: 92%
 Includes structured solutions and private
placements
– Capital Markets: 8%
Capital Market Solution
 Policy Structure
Reinsurance
– Max coverage is TL 40B (about $30k)
– 2% deduction applied over the sum insured
Structured Solution
 Distribution
Reinsurance
– Compulsory purchase by residential property owners
through private insurers
Structured Solution
€175m
Reinsurance
Retention
Source: GC London
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Case Study: Taiwan Residential Earthquake Insurance Fund
 Covers residential earthquake
TWD 70bn
Government
 Claims paying capacity
– TWD $70 billion (manage to 1 in 400 yr return)
TREIF Fund
 Risk Financing Structure
– Industry coinsurance (29%)
– TREIF Fund (35%)
– Reinsurance (21%)
Reinsurance
– Government (15%)
 Policy Structure
– Sum insured of TWD 1.2mn + 180k living expenses
TREIF Fund
– Loss must exceed 50% of replacement cost
 Distribution
– Through member insurance companies
TWD 2.8bn
Coinsurance
– Not compulsory, but mortgage lenders require it
Sources: GC Hong Kong, TREIF Website
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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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Policy Pricing
 Two Categories:
Exposure-Based
Fixed
– Exposure-Based Pricing
 Location (Zones)
 Construction type
 Age of building
– Fixed Pricing
 Set amount
 Set percent
- Building type
- Fire premium
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Iceland
USA
Norway
Japan
France
Germany
Spain
Turkey
Switzerland
Mexico
Taiwan
New Zealand
8
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
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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
Types of building
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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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Claims Management
 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)
 Claims payout procedures differ by pool:
– JER uses staggered claims payout
approach depending on damage level
JER Payout Structure
Extent of Extent
damageof damage
– TCIP’s claims assessment based on
replacement cost of each type of BuildingsBuildings
of the50%
sumofinsured
orinsured
70% of or
the70%
floorofarea
Damage50%
exceeds
the sum
the floor area
building. Loss payment is limited toDamage exceeds
Damage between
and 50%
the50%
sumofinsured
orinsured
betweenor20%
and 20% and
Damage20%
between
20%ofand
the sum
between
sum insured.
70% of the70%
floorofarea
the floor area
Damage between
and 20%
the20%
sumofinsured
– TREIF loss triggers based on actual
Damage3%
between
3%ofand
the sum insured
total loss or constructive total loss Contents Contents
Damage exceeds
of the80%
sumofinsured
Damage80%
exceeds
the sum insured
(when repair cost of damage is more
Damage between
and 80%
the80%
sumofinsured
Damage30%
between
30%ofand
the sum insured
than 50% of the replacement cost of
Damage between
and 30%
the30%
sumofinsured
Damage10%
between
10%ofand
the sum insured
the building)
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Percentage
Perce
payable pay
100
10
50
5
5
5
100
10
50
5
5
5
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Conclusion
Let’s review your initial questions…

1
Will international reinsurance support be available?
2
Will the government be willing to subsidize premium and give tax
breaks?
3
How should the cover be priced?
4
How should claims be determined and paid?
5



How should the Sum Insured be selected?

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