Managing Catastrophe Risks of Natural Disasters Managing Catastrophe Risks of Natural Disasters at the Country Levelat the Country Level

Elena Cabrejo de Valle

Reinsurance Intendent

Deputy Superintendence of Insurance

Superintendence of Banking and Insurance

Ecabrejo@sbs.gob.pe

Lima - Perú

PONTIFICIA UNIVERSIDAD CATÓLICA DEL PERÚ

Red Global de Aprendizaje para el Desarrollo

Global Development Learning Network

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.

 

I. Desastres Naturales en el PerúI.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.

II. Percentage of expected annual economic losses due to natural disasters insured

Natural Disasters in Perú Earthquakes “El Niño” Phenomenon

Place Huaraz Arequipa Perú Perú Date 31/5/70 23/6/01 1982-1983 1997-1998 Intensity (Richter Scale) 7,50 7,90 Area (Km2) 83.000 250.000 Cassualty 75.000 97 512 374 People Affected 150.000 2.713 8.500 412 Personas Damnificadas (Millions) 3.000 0.23 1.23 0.59 Houses afected 160.000 59.078 146.780 109.902 Economic Losses (Millions of US$) 500.000. 300 1.000 3.500. Insured Losses (millions US$) 10 70 N.D. 180. Local Insurers (millions US$) 1 3. N.D. 5%-10% GDP -12% Percentage of economic losses insured 0,002% 23,333% N.D. 5,143%

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.

Percentage of the Ceded and Reteined Insured Amounts

93.00%

94.00%

95.00%

96.00%

97.00%

98.00%

99.00%

100.00%

101.00%

% Cedido % Retenido

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.

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

VI. Management of natural disasters risk in Peru

a) The implementation of an Annual Reinsurance Plan

b) 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

• 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.

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.

VI.2 Disadvantages

• A) The catastrophic reserve is used to protect the reinsured’s 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.

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.