Policy Framework. for the Improvement of Financial Management Strategies to Cope with Large- Scale Catastrophes in Chile

Transcription

1 Policy Framework for the Improvement of Financial Management Strategies to Cope with Large- Scale Catastrophes in Chile Prof. Alberto Monti Bocconi University Paris, 23 June 2011 High-Level Roundtable on the Financial Management of Earthquakes Structure of the report OECD Area: different policy approaches Policy Handbook on Natural Hazard Awareness and Disaster Risk Reduction (2010) OECD Recommendation on Good Practices for Mitigating and Financing Catastrophic Risks (Integrated Framework) 16 December 2010 Chile: response to 27F and critical areas Issues, questions and lessons learned from OECD experience Conclusions and recommendations Appendix: overview of institutional schemes 2 1

2 Chile: 27F Key positive aspects Building codes and seismic construction standards Performance of private insurance sector Regulatory Authority (SVS) and Private Insurers Proactive governmental approach to emergency response and reconstruction Ministry of Finance / DIPRES Ministry of Interior Ministry of Housing and Urbanism: subsidies 3 Chile: 27F EQ Insurance coverage Total estimated loss: USD 25-30bn Estimated insured loss: USD 8bn 90% reinsured abroad 1.8 times the amount of catastrophe insurance premiums collected during the past 30 years Operational challenge: claims handling EQ and tsunami coverage: Excluded from standard fire insurance policies Optional riders 4 2

3 Legal Requirements Banking Regulation Mortgage loans: property held as collateral must be insured against the risk of fire Condominium Law All units and co-owned portions of the building must be insured against the risk of fire Regulation on Public Works Concessions PPP projects (major infrastructures) Mandatory CAT insurance: construction / operation 5 Insurance coverage of mortgaged residential properties Optional riders: EQ and tsunami coverage Routinely required by Chilean banks 95% of mortgaged residential properties covered Not available for adobe houses Key limitations Indemnity may be limited to outstanding amount of loan No coverage for living expenses 6 3

4 Insurance coverage of mortgage-free residential properties Low take-up rate on voluntary market Fire insurance: less than 20% EQ + tsunami riders: around 5-10% 7 Table 1 ( ) ( ) Source: SVS data provided in a presentation made on 21 April 2010 at the annual ASSAL meeting ( ) Approximate number of houses located in areas affected by 27F, assuming that the fire insurance coverage requirements were fully complied with With a mortgage loan Without a mortgage loan Total Number of % % Number of % % N. houses % houses houses Total ( ) With fire insurance With fire and EQ insurance

5 EQ insurance take-up rates in other countries California: 12% Japan: 25% New Zealand: 90% Turkey: 25% Chinese Taipei: 28% 9 Chile: EQ coverage Commercial/industrial PPP Infrastructures: covered (mandatory) Major risks: covered (int l programs) State-owned enterprises: covered Small commercial risks: not covered 10 5

6 Chile: envisaged regulatory changes Marketing of collective insurance policies covering portfolios of mortgages Transparency issues Cost / fee structure Competitive bidding process (public tender) Issue: incentive mechanism 11 Chile: envisaged regulatory changes (cont d) Minimum standard conditions of coverage Periodic information duties / transparency Streamlining of loss adjusting procedures in case of major events Revision of rules on EQ catastrophe reserve 12 6

7 Chile: Need for a Coordinated Governmental Plan Coordination of different Authorities Coordination of different phases Risk prevention / Risk reduction / Risk mitigation / Risk awareness and education / Emergency response / Financial coverage / Reconstruction Reform of National Civil Protection Agency 13 Chile: critical areas Coverage of public buildings and infrastructures (other than PPPs) Coverage of social houses condos and adobe houses (current subsidies) Coverage of residential buildings Volatility of catastrophe insurance prices 14 7

8 Conclusions and recommendations 1. Coordinated governmental plan at the highest political level 2. Comprehensive risk analysis 3. More technical approach to catastrophe risk underwriting 4. Development of a stand-alone earthquake insurance product for public buildings 15 Conclusions and recommendations 5. Mandatory (or quasi-mandatory) earthquake and tsunami insurance (residential property) 6. Public subsidies to cover part of the cost of catastrophe insurance for the poor 7. Earthquake and tsunami micro-insurance 8. Public-private risk sharing arrangement Expanding financial coverage (uninsured assets) Increase retention and reduce price volatility Access to CAT-linked securities and reinsurance 16 8

9 Muchas gracias! Contact Prof. Alberto Monti Bocconi University Department of Law «Angelo Sraffa» 1, via Roentgen Milano (ITALY) alberto.monti@unibocconi.it