1 / 22

Managing Catastrophe Exposures in Mexico: Country Experience

How Can Insurance Regulators and Government Policymakers manage catastrophe risk?. Managing Catastrophe Exposures in Mexico: Country Experience. Manuel Aguilera-Verduzco President of the Insurance and Surety National Commission (CNSF). Contents. Catastrophic Risks. Insurance Regulation.

jafari
Download Presentation

Managing Catastrophe Exposures in Mexico: Country Experience

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. How Can Insurance Regulators and Government Policymakers manage catastrophe risk? Managing Catastrophe Exposures in Mexico: Country Experience Manuel Aguilera-Verduzco President of the Insurance and Surety National Commission (CNSF)

  2. Contents Catastrophic Risks Insurance Regulation Seismic Risk Final Remarks

  3. Catastrophic Risks

  4. Seismic VolcanicEruption Hurricane and Hail - Flooding Catastrophic Risks • Mexico’s geographic situation makes it highly vulnerable to natural phenomena. Among the most important risks are:

  5. Seismic risk in Mexico • Mexico is highly exposed to earthquakes’ occurrences due to the seismic fault located in the Southeast cost of the country. • Seismic activity in Mexico is one of the most important around the world. • Large earthquakes may cause significant human and economic losses and, potentially, put insurance companies in an insolvency position, especially if not proper regulation is in place. • Therefore, the Insurance and Surety National Commission (CNSF) recognised the need of a careful technical analysis of earthquakes’ effects in order to estimate the losses that may be caused by this kind of events.

  6. Seismic risk in Mexico • The American Continent is divided into six earth fragments: 1 1. North American Plate 2. Pacific Plate 3. Cocos Plate 5 4. Nazca Plate 3 2 5. Caribbean Plate 6 6. South American Plate 4

  7. Seismic risk in Mexico • Mexico is located in a sub-ductionregion where several tectonic plates collide. North American Plate Pacific Plate Cocos Plate

  8. Earthquakes in Mexico (1908-2003) Magnitude > 6.5°

  9. Seismic risk in Mexico • The effects of the 1985 earthquake motivated the developmentof engineering studies and the revision to several by-laws: • New technological developments were used to evaluate and measure the phenomenon. • A new Building Code was implemented. • The EI-UNAM* developed a software in order to asses the seismic risk of Mexican insurance companies’ building portfolios. • Adjustments to the insurance regulation were implemented using new technical basis. * EI – UNAM: Engineering Institute of the Universidad Nacional Autónoma de México (UNAM)

  10. Insurance Regulation Seismic Risk

  11. Insurance Regulation • The EI-CNSF System provides 2 elements: • Risk Premium • Probable Maximum Losses • It also offers the possibility to compute technical items like the: • unearned premium reserve, • catastrophic reserve, and the • solvency margin.

  12. Insurance Regulation • Unearned Premium Reserve • Is the amount of the unearned premium risk at the time of the valuation. • It should be constituted with 100% of the risk premium (calculated by the EI-CNSF system). Costs and Profit Unearned Premium Reserve Risk Premium

  13. Insurance Regulation Risk Premium (RP) • Unearned Premium Reserve • It’s calculated by the system requiring a minimum of (mandatory) information in order to measure a building’s probability of damage in case of earthquake. Mandatory information Optional information Optional Information Example: Postal code, latitude, use (commercial, residential, industrial), land irregularities, walls’ type, open spaces, building date, etc. Mandatory Information Example: Policy number, insurance term, insured value, % of retention, seismic zone, building type, etc. Precisely quota (reduction in the RP) + Conservative quota

  14. Insurance Regulation • Unearned Premium Reserve • As the premium is earned by the company, the reserve is released in that proportion and is used to increase the catastrophic reserve (in a monthly basis). Unearned Premium Reserve Catastrophic Reserve

  15. Insurance Regulation • Catastrophic Reserve • Is considered as a “long term unearned premium reserve”. • It was implemented after the experience of the 1985’s earthquake. • It’s accumulation is confined by a technical limit determined by the Probable Maximum Loss (PML), calculated by the EI-CNSF system.

  16. % % % % % % Insurance Regulation Insurance Regulation • Catastrophic Reserve (CR) Probable Maximum Loss Is defined as the total amount of expected portfolio losses during a single critical event and is calculated by the EI-CNSF System. 1. Different seismic scenarios 2. Expected loss % for each structure 3. PML for each seismic scenario 4. Average of PML = Technical limit PMLA Scenario 1 Scenario 2, Scenario 3, . . . , Scenario n

  17. R1 R2 Technical requirement relative to the earthquake risks retained by the insurer Requirement resulting of deficiencies in the proportional risk cession Insurance Regulation Solvency Margin • Solvency Requirement (SR) The Earthquake SR is defined as: SR = R1 + R2 +

  18. Insurance Regulation Solvency Margin • The Technical Requirement (R1) is defined as the Probable Maximum Loss (calculated by the EI-CNSF System) of a company’s portfolio (PMLC). R1 = PMLC Retained cumulus portfolio

  19. Insurance Regulation Solvency Margin • The Requirement for the reinsurance’s proportional cession deficiencies (R2) is defined as the percentage of the retained premiums (PR) that were ceded to non-registered reinsurers* (PCNR) applied to the PMLC of the company’s portfolio. R2 = PMLC * (PCNR/PR) (Non-registered reinsurers index – 1) * This register is granted by the Ministry of Finance to foreign reinsurers with a rating higher than: BBB- (Standard and Poor’s and Fitch); B+ or FRP= 5 (A.M. Best); or Baa3 (Moody’s).

  20. Final Remarks

  21. Final Remarks • The Mexican experience in natural disasters had stimulated the process of regulation improvement, aimed to enhance the financial stance of insurance companies. • The Seismic System is an example of the insurance regulators’ effort for managing catastrophic risks taking into account the long term financial viability. • Hurricanes’ frequency and severe effects make necessary the development of new technical basis for their regulation. • Nowadays, the EI-UNAM-CNSF is working out with a hurricanes’ research, in order to estimate their frequency and severity. • Our goal is to have a Hurricane System similar to the seismic one, taking into account Mexico’s specific characteristics.

  22. How Can Insurance Regulators and Government Policymakers manage catastrophe risk? Managing Catastrophe Exposures in Mexico: Country Experience www.cnsf.gob.mx maguilera@cnsf.gob.mx

More Related