Disaster Risk Financing Global Approaches 11 August 2010 Reed Bouchelle, New Delhi

1 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 Goal: To provide you with information

2 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

3 Guy Carpenter Government Disaster Risk Schemes Sources of Financing Source: GC internal study Survey includes: California, Taiwan, Turkey, Japan, New Zealand, Romania, Norway, Switzerland, Iceland, Mexico

4 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 website Includes Cat Bond capacity $9.763b Reinsurance & Cat Bond Revenue Bond Industry Assessment Capital $3.7b

5 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 Capital Market Solution Structured Solution Reinsurance Retention €175m Source: GC London

6 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

7 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)

8 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

9 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

10 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

11 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) JER Payout Structure

12 Guy Carpenter Conclusion Let’s review your initial questions… 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?     