Managing Catastrophe Risks of Natural Disasters at the Country Level

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Managing Catastrophe Risks of Natural Disasters
at the Country Level
PONTIFICIA UNIVERSIDAD CATÓLICA DEL PERÚ
Red Global de Aprendizaje para el
Desarrollo Global Development Learning Network

• Elena Cabrejo de Valle
• Reinsurance Intendent
• Deputy Superintendence of Insurance
• Superintendence of Banking and Insurance
• Ecabrejo_at_sbs.gob.pe
• Lima - Perú

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I. Natural Disasters in Peru

• I.1 Earthquakes
• I.1.1 Fire Circle It is one of the most active
  seismic zones of the planet. In this area has
  place the 80 percent of the earthquakes of the
  world.
• I.1.2 Interlink between tectonic plates
  (Subduction process).- It is originated because
  the Nazca Plate collides with the South American
  plate and get entrance below that bringing about
  its raising and consequently the well known and
  feared earthquakes.
•  

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I. Desastres Naturales en el Perú

• I.2 Flood
• I.2.1 El Niño Phenomenon. It is a climatic
  anomaly of the Pacific Ocean that takes place
  every four or seven years. The cause is
  attributed to complex process of interactions
  between the Ocean and the atmosphere because of
  the abnormal high temperature of water in front
  of Ecuador and Perú. It occurs during a period of
  about 4 consecutive months bringing about rains,
  flows and overflow of rivers.

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II. Percentage of expected annual economic losses
due to natural disasters insured
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III. Risk transfer patterns for catastrophe type
risks in the local insurance industry
In the local insurance industry, the ceded risk
vs retained risk ratio for catastrophe risks, for
the last two (2) years, in average, is 26.93.
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IV. Rationality of the current retentions of
catastrophe risk by local insurance companies

• The catastrophe risk retentions for earthquake
  by local insurance companies is made-up by the
  Priority of the Excess Loss of the Catastrophe
  Risk Contract..
• Nevertheless, the catastrophe retention for
  floods, presently, is under assessment.
•  

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V. The current rates for natural disasters risk
coverage actuarially

• En el Perú, la Pérdida Máxima Probable (PML) es
  de 10. Esta estimación ha sido realizada por los
  reaseguradores, fundamentándose básicamente en
  estudios realizados por los departamentos de
  riesgo de grandes reaseguradoras como la Munich
  Re, Swiss Re y American Re, sustentándose en
  información sísmica, estudios de suelos,
  condiciones de las pólizas originales de seguros
  y tipos de construcción a nivel local

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VI. Management of natural disasters risk in Peru

• a) The implementation of an Annual Reinsurance
  Plan
• The implementation of a Risk Department, who will
  assess the maximum retention level that could be
  assumed by the insurance companies in relation
  with their equity.
• c) Reinsurance contracts only with sound
  reinsurance companies

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• d) If there is no CATXL contract, the insurance
  company has to establish a catastrophic reserve
  that represents the total amount of the PML.
• e) The use of fifty percent (50) of the
  established catastrophic reserve for each
  catastrophic event, only with the previous
  consent of the Superintendency.
•  
• f) The development of an information system that
  helps, both the insurance company and the
  Superintendency, in the assessment of the ceded
  and retained catastrophic risk.

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VI.1 Advantages

• A) Easy calculation and corroboration.
• B) There is no big capitals involved that could
  affect the soundness of the insurance company.
• C) There is no risk retention in the country, all
  of it is retained by the reinsurer.

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VI.2 Disadvantages

• A) The catastrophic reserve is used to protect
  the reinsureds business in respect of
  earthquake, storms and floods. Therefore, there
  is no difference in the catastrophic reserve for
  risks of different nature)
• B) The catastrophic risk is protected by the
  reinsurance contract. If Reinsurance Company
  becomes insolvent due to a catastrophic event,
  the insurance company would be also insolvent.
• C) The catastrophic reserve could be insufficient
  because there is not an adequate assessment of
  floods.

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VII Another possible alternative approaches

• A) Catastrophic reserve is equal to the
  deductible or priority of the reinsurance
  contract.
• B) The accumulation of annual received premiums
  up to the PML.
• C) The accumulation of retained premiums up to
  the PML or in excess of it.