Natural catastrophes: A risk transfer concept for Italy

Transcription

1 Natural catastrophes: A risk transfer concept for Italy AIDA Michael seminar Schwarz, on natural December catastrophes 2007 Milan, 19 January 2009 AIDA Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re

2 Insured nat cat losses are increasing, though not those caused by earthquakes losses in USD billions Insured Weather-related Losses Insured Earthquake Losses Slide 3 Insured worldwide cat losses > 42.5m (property/business interruption) at 2009 price levels in USD bn Source: Swiss Re catastrophe datase as of Dec 09

3 The same as before but now showing total economic losses losses in USD billions Uninsured Weather Losses Uninsured Earthquake Losses Weather-related Losses Insured Earthquakes Losses Slide 4 Total economic worldwide cat losses at 2009 price levels in USD bn Source: Swiss Re catastrophe datase as of Dec 09

4 Nat Cat modelling: Four elements that determine a cat loss Hazard Vulnerility Value Distribution Cover Conditions L How often / how strong? How well built and protected? What exactly is covered... where... and how? F Sums insured Cover limits Deductibles Exclusions etc. AIDA Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re Slide 5

5 Show LFC animation Slide 6

6 Relative expected loss Slide 7

7 Premium components Profit Margin Capital Costs Underwriting, Administration & Loss handling Costs Expected Loss Slide 8

8 Watch where you park your car! Slide 9

9 When travelling pay attention to the storey level of your hotel room Slide 10

10 Earthquake insurance is well estlished and a mature product Sophisticated risk assessment tools availle Comprehensive earthquake coverage offered by all major insurance companies (building and contents) for several decades now with decent take up rates for industrial risks Building quality not great, though comparle to other earthquake exposed Mediterranean countries Coverage is associated with a risk transfer cost, but affordle; Swiss Re has structured and offered such a residential earthquake product to Italian insurers Problem of anti-selection if coverage is not compulsory Slide 11 however, there is a wide spread mentality within the Italian population that there is no need for such a protection because of various reasons ( I will never be affected by a damage and if I will, the government will step in anyway )

11 Economic vs insured loss potentials (examples) 1 adjusted to economic growth of values at risk since actual event 2 figures related to 2006 GDP, i.e bn, respectively 2006 state budget payments, i.e. 448 bn 3 Source: Banca d Italia 4 constant budget receipts and payments as well as central government borrowing requirement of 36 bn in 2006 assumed AIDA Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re Country Scenario Loss potential (bn EUR)* economic insured Italy EQ >50 4 China EQ >100 <3 Japan EQ Tokyo Mexico EQ Mex. City >50 4 USA EQ California USA/Caribbean Hurricane * 1 in 200 year events Source: Swiss Re Nat Cat R&D Economic impact Estimated economic loss 1 Percentage of GDP 2 Percentage of state budget payments 2,3 Increase of central government s borrowing requirements 3, Messina bn % ~10 25% ~ % Slide 13

12 Advantages of a pre-event financing approach Guaranteed right for compensation Rapid pay-out and recovery, especially with innovative instruments such as parametric solutions No payback obligation (in contrast to loans) Less pressure to divert government funds from other projects to affected areas Clear definition of scope of cover Professional loss settlement Every one s contribution can be based on their actual exposure AIDA Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re Slide 14 Institutionalised framework to manage losses by an international network of risk carriers Prevention and loss mitigation can be supported by risk adequate premiums, deductibles and discounts

13 Prerequisites for comprehensive natural perils insurance Size of loss Building principles: Events: minor medium large catastrophic Capital markets Reinsurance Insurers Policyholders To sorb large nat cat events, risks need to be shared between policyholders, domestic insurance industry, global reinsurance industry, and capital markets Regulatory Framework Catastrophe reserves Solvency requirements Compulsion/Tariffs Risk Sharing Individuals/Companies Insurance/Reinsurance Capital markets Adequate Premiums System needs to generate premiums covering average loss burden plus costs and margins Slide 15

14 Solution I: Compulsory insurance scheme for residential risks backed by a pool Italy s private insurance industry transfers the majority of residential natural catastrophe risks in a central pool. The Italian government sets up the necessary legal framework (i.e. compulsory insurance and guarantees its enforcement in order to ensure an efficient and effective pooling of risks. The capital markets can provide the necessary capacities in excess of private insurance market capilities A compulsory pool solution will lead to a significant increase in insurance coverage and penetration and thus dramatically reduce the government s commitment to disaster relief and its burden as insurer of last resort Mandatory scheme ensures avoidance of adverse selection and thus guarantees the building of a real risk sharing community AIDA Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re Slide 16

15 Case study Turkey: Earthquake pool for residential dwelling Solution features Insured Peril: Earthquake Insured assets: Private residential dwellings Significantly increased penetration of earthquake coverage in Turkey Limit of policy coverage: TRY (EUR ); additional cover can be bought from private insurers. Inception: in 2000 Funding: Compulsory premiums paid by homeowners Major earthquakes since Earthquake in Izmit (7.0) 1999 Earthquake in Düzce ( Earthquake in Izmit (5.6) 2003 Earthquake in Bingol (6.4) 2005 Earthquake in Bingol (5.6) 2006 Earthquake in Sivricel (3.9) Involved parties Insurance supplier: TCIP, a legal public entity Operational manager: Garanti Sigorta Distributors: 30 local insurance companies and their agencies on behalf of TCIP Reinsurers: Swiss Re and other overseas reinsurers Slide 17

16 Solution II: Parametric cover Complementary to Solution I The Italian government could purchase parametric cover from the insurance and capital markets: This protection would pay out a pre-determined amount in case of an earthquake exceeding certain parameters The received funds can be used by the government to provide relief to the affected population and/or to rebuild infrastructure and to protect its revenue gap and thus ensures budget certainty Trigger mechanism defined as a function of earthquake magnitude, location and distance to populated areas Claims are paid shortly after the event, once official data on the earthquake are availle AIDA Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re Slide 18 Unlike insurance/reinsurance, there is no need to evidence all claims or prove losses (subject to local regulation) Innovative instrument sends positive signal to Italy s stakeholders

17 Case study Mexico: Funding for immediate relief efforts after earthquake Solution features Insured peril: Earthquake Payments to be used for immediate emergency relief after earthquake Aggregate insurance limit: USD 450 million USD 290 million: Parametric reinsurance coverage USD 160 million: Parametric cat bond Trigger type: Index, physical trigger (quake magnitude) Time horizon: May 2006 May st cat bond issued in Latin America Involved parties Insured: Fund for Natural Disasters (FONDEN) AIDA of Mexico Seminar, 19 January 10 Nat Cat Insurance Solutions Serge Tröber, Swiss Re Reinsurer and arranger of cat bond Swiss Re Slide 20

18 Public Private Partnerships (PPP): Contributions in risk management Contributions Risk awareness Raise awareness for risks and solutions Risk prevention Strengthen countries' resources for risk prevention measures and reduction in vulnerility to disasters Risk transfer Build / improve environment for risk transfer solutions (e.g. regulatory and legal framework, data series for new covers) Public Sector Insurance Enle efficient access to markets (e.g. changes in legislation, if necessary) Develop risk transfer products and structures that address the needs most effectively Manage and sorb risks; Determine adequate risk premiums ( ) Financial support, particularly in start-up phase and pilots ( ) Transfer of global best practices To be successful PPPs need a strong commitment from all involved parties, Slide 22 mutual reliility, flexibility, openness for innovation and out-of-the-box thinking! ( )