Disaster Risk Financing Global Approaches

1. 11 August 2010 Disaster Risk FinancingGlobal Approaches Reed Bouchelle, New Delhi

2. 2 3 Agenda 1 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

3. How does the USA manage cat risk? Flood Coverage for residential property Managed at Federal level No reinsurance purchased Earthquake Residential earthquake California-specific program CEA purchases reinsurance Hurricane Alternative markets for high-risk properties State-level pools and FAIR plans Each plan purchases reinsurance

4. Government Disaster Risk SchemesSources of Financing Source: GC internal study Survey includes: California, Taiwan, Turkey, Japan, New Zealand, Romania, Norway, Switzerland, Iceland, Mexico

5. Case Study: California Earthquake Authority $9.763b Industry Assessment • 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 Revenue Bond Reinsurance & Cat Bond Includes Cat Bond capacity $3.7b Capital Sources: GC Los Angeles, CEA website

6. €1.5b Case Study: Turkey Catastrophe Insurance Pool Reinsurance • 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 Capital Market Solution Reinsurance Structured Solution Reinsurance StructuredSolution Reinsurance €175m Retention Source: GC London

7. Case Study: Taiwan Residential Earthquake Insurance Fund TWD 70bn Government • 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 TREIF Fund TWD 2.8bn Coinsurance Sources: GC Hong Kong, TREIF Website

8. 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)

9. Policy Pricing Exposure-Based Fixed • Two Categories: • Exposure-Based Pricing • Location (Zones) • Construction type • Age of building • Fixed Pricing • Set amount • Set percent • Building type • Fire premium Iceland Norway France Spain Switzerland Taiwan New Zealand USA Japan Germany Turkey Mexico

10. 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

11. 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

12. 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

13. 2 5 Conclusion Let’s review your initial questions…  1 Will international reinsurance support be available?  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?  How should the Sum Insured be selected?

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