Mav 027 0225

CATASTROPHIC RISK AND INSURANCE
Vasudeva Sakshi
Management Prospective Ed. | « Management & Avenir »
2009/7 n° 27 | pages 225 à 240

ISSN 1768-5958
DOI 10.3917/mav.027.0225
Article disponible en ligne à l'adresse :
--------------------------------------------------------------------------------------------------------------------
https://www.cairn.info/revue-management-et-avenir-2009-7-page-225.htm
--------------------------------------------------------------------------------------------------------------------
Distribution électronique Cairn.info pour Management Prospective Ed..

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

© Management Prospective Ed.. Tous droits réservés pour tous pays.
La reproduction ou représentation de cet article, notamment par photocopie, n'est autorisée que dans les
limites des conditions générales d'utilisation du site ou, le cas échéant, des conditions générales de la
licence souscrite par votre établissement. Toute autre reproduction ou représentation, en tout ou partie,
sous quelque forme et de quelque manière que ce soit, est interdite sauf accord préalable et écrit de
l'éditeur, en dehors des cas prévus par la législation en vigueur en France. Il est précisé que son stockage
dans une base de données est également interdit.
Powered by TCPDF (www.tcpdf.org)

Catastrophic risk and insurance
par Vasudeva Sakshi
Résumé
Les risques catastrophiques sont de ceux qui exposent le plus de personnes
à un péril. Au fur et à mesure des années, les incidences et la sévérité des
catastrophes s’accroissent. Celles-ci peuvent avoir de graves implications
pour les ménages les plus pauvres qui ne disposent pas des ressources
nécessaires pour se protéger des désastres. Elles peuvent aussi suspendre
les progrès d’ensemble d’une économie. Par conséquent, aucune économie
ne devrait omettre de prendre les dispositions suffisantes afin de lutter contre
les pertes financières dues aux catastrophes. L’assurance est l’une des
approches pour réduire l’intensité des effets postérieurs aux événements
catastrophiques. Elle recèle plein d’avantages dans la mesure où elle
procure une assistance financière opportune après les chocs dus à des
événements extrêmes ; cela a aussi pour effet de réduire les conséquences
à long terme des désastres. L’assurance diminue également la dépendance
à l’égard de ressources ex-post et sécurise à l’avance la disponibilité des
ressources nécessaires. Cela déplace le fardeau des pertes de l’Etat ou la
communauté vers les assureurs. Ceux-ci ont des approches diverses pour
mener l’identification, la réduction et le transfert des risques. Au niveau d’un
Etat, aucun système d’assurance ne peut suffire à lui seul. Un partenariat
public-privé est nécessaire pour disposer de solutions effectives basées sur
des assurances visant à couvrir les risques catastrophiques.
Abstract

Catastrophic risk is one where a large number of people are exposed
to the occurrence of peril. With the passing times, the incidence and
severity of catastrophes is increasing. Catastrophes can have serious
implications on poor households as they do not have sufficient resources
to protect themselves from disasters. Major catastrophes can put the
whole progress of economy at halt. Therefore, no economy should ever
dare to ignore making sufficient provisions to combat the financial losses of
catastrophe. Insurance is one of the approaches to reduce the intensity of
after effects of catastrophes. It is extremely beneficial as it provides timely
financial assistance following extreme event shocks; as a result long-term
consequences of disasters are reduced. Insurance also diminishes the
reliance on ex post resources and secure the needed resources in advance.
It pushes the burden of loss from state/ community to insurer. It has multiple
approaches as it works on to identify/reduce/transfer risks. For countries,
no single system of insurance can be sufficient. Public private partnership
is required to provide an effective Insurance based solutions to provide
coverage for catastrophic risks.
225
27
Catastrophic risk is one where a large number of people are exposed to the risk of
a large loss by reason of the occurrence of a peril. It could be a natural calamity in
the form of earthquakes, floods, draughts or even terrorism attack resulting in loss
of life, destruction of infrastructure on a large scale. The September 11 attacks
(often referred to as 9/11) are the most dreaded example of catastrophic terrorism
attack. 9/11 was a series of coordinated suicide planned by ‘Al Queda’ upon
the United States on September 11, 2001 where in excluding the 19 hijackers,
2,974 people died in the attacks. World Trade Center collapsed. The attacks left a
significant economic impact on the United States and world markets. Catastrophes
have occurred many times in history at global level also which affected many
economies. Some of the most devastating global catastrophic risks resulting in
loss of more than 10 million lives include the Taiping Rebellion (1851-1864), and
the famine of the Great Leap Forward in China, the Black Death in Europe, the
Spanish flu pandemic, the two World Wars, the Nazi genocides, the famines in
British India, Stalinist totalitarianism, and the decimation of the native American
population through smallpox and other diseases.
Catatrosphes can have an adverse impact not only on the public finances of an
economy but also can impinge on the very subsistence of poor and vulnerable
communities. With the passing times, the incidence and severity of catastrophes
is increasing. Swiss Re’s sigma study on catastrophes indicated that more than
2, 38,000 people lost their lives due to the natural catastrophes and man-made
disasters in 2008 - the fourth largest number of deaths since 1970. Catastrophes
in 2008 cost the society $ 225 billion. It includes both insured and uninsured
losses to buildings, infrastructure and vehicles. Out of it, $ 50 billion was covered
by property insurance, making 2008 the second costliest year ever in terms of
insured losses The Sichuan earthquake was the costliest at $ 85 billion. Major
catastrophes can put the whole progress of economy at halt. Sock markets plunge,
GDP growth comes down, the financial strength of the economy weakens and a

lot more. Therefore, no economy should ever dare to ignore making sufficient
provisions to combat the financial losses of catastrophe.
How countries are affected due to catastrophes ?

Catastrophes can have serious implications on poor households as they do not
have sufficient resources to protect themselves from disasters. In the event of a
disaster, poor communities often resort to self-insurance and informal means of
risk management. If the intensity of the loss is not too severe and probability is high,
self financing and informal means of risk management are effective. However,
in the case of low probability, high intensity a loss, self financing and informal
means of risk financing are ineffective. In the case of severe floods or droughts
where the risks are systemic, the ex-post informal means of risk management
include selling of assets. As the risks are correlated, therefore, large numbers of
households resort to selling their assets at the same time which brings down the
value of assets. The same holds true for wages. Poor farm households resort
226
to off-farm means of coping with their losses. Since, the risk is spread over a
substantial geography, the excess supply of labour and weakened financial
capacity of the businesses depress the wages received. Therefore, systemic
risks results in large scale loss in wage, income and work. It leads to growth in
indebtedness and vulnerable communities are caught in the poverty trap.
Resource allocation dor disaster management

Catastrophe Risk management is an integral Part of Country Risk Management.
World Bank Group plays an active role in assisting its client countries with building
effective catastrophe risk management systems as natural disasters have a
disproportionately adverse impact on the poor.
Risk pooling and risk transfer

It is high time that the scope of disaster risk management in India needs to be
extended. Risk Pooling and Risk Transfer can prove to be very effective and
complementary to disaster relief, rehabilitation and reconstruction. Risk layering
can be used to identify the varied intensity of catastrophe risk and the role of each
stakeholder in catastrophe risk management.
Appropriate risk financing for different types of risks is shown in Exhibit 1.1.
Exhibit 1.1. : Nature of Risk and Appropriate Risk Financing
Nature of Risk RISK FINANCING TECHNIQUE
Frequent Less Severe Risk Self Financing
Less Frequent Moderate Risk Risk Pooling and Risk Transfer
Assistance from Outside Agencies such as World bank or
Correlated Losses
Reinsurance Agencies
For the first category of the risk, the community can resort to savings and credit.

The second layer could be covered by markets - insurance companies. If the
impact of the disaster is severe and is beyond the scope of Insurance companies
there is a need to look for options outside the domestic country through World
Bank assistance and Reinsurance Contracts. The reinsurance could be provided
by Reinsurers or Multi-lateral agencies. Munich Re is the world’s largest
reinsurance company with over 5,000 customers in 160 countries and has its
headquarters in Munich, Germany. It was one of the major insurers of the World
Trade Centre in New York City that was destroyed on 11 September, 2001.
Insurance as an effective means of risk financing

Risk transfer mechanisms could increase efficiency in targeting relief and
rehabilitation for a particular region if a proper mapping exercise of the disaster
prone area is in place and the vulnerable population is identified. Insurance is
extremely beneficial as it provides timely financial assistance following extreme
event shocks; as a result long-term consequences of disasters are reduced.
227
27
Insurance also diminishes the reliance on ex post resources and secure the
needed resources in advance. It pushes the burden of loss from state/ community
to insurer. It has multiple approaches as it works on to identify/reduce/transfer
risks. Resulting risk reduction is a tool for sustainable development. It can
monitor the quality/extent of mitigation measures. Insurance can incentives risk
reduction approaches. These are generally inbuilt with incentives for effective risk
adaptation and reconstruction. For instance, if an insurance system is in place in
a region where an earthquake has occurred, the payout needs to be proportional
to the magnitude of the losses. So, the insurers have an incentive to spend
considerable time and money in building earthquake-resistant structures. But if
should always be remembered that insurance does not reduce immediate
disaster impacts, but provides indemnification against the losses by pooling
risks against a premium payout.
Role of insurance
Insurance significantly empowers people and economy. Insured catastrophes
occur when a single event (peril) can affect a large percentage of the loss
exposed units in the insurance pool. In other words, losses are interdependent.
Catastrophic risks, both natural and man-made, are fundamentally different from
most other insurance risks in two critical ways :
Frequency of Occurrence : Catastrophic events occur relatively infrequently

compared to most other insurance risks. This makes catastrophic risks difficult
to manage and price as there is not sufficient empirical information. They are not
accurately predictable.
Intensity of the loss : The severity of loss resulting from catastrophic events
differs from more traditional insurance risks in two important ways. First, the
severity of loss is not as predictable; similar events can produce altogether

different losses. Secondly, and more importantly, catastrophic risks can produce
losses of sufficient magnitude as to render insurers insolvent. Insurer may suffer
heavy losses if they have provided coverage in those areas having catastrophic
loss exposure. Similarly, they might not have taken cognizance of the scope for
such a catastrophe while calculating premiums.
Insurance based solutions

Insurance based solutions for managing catastrophic risks depends on the degree
to which risks are transferred to the parties that ultimately bear the risk.
National Catastrophic Insurance Pools A country can choose to pool their

disaster risk when the risk is large enough and the correlation of risks between
the participating clients is relatively low.
Commercial Micro Insurance It is distinguished from other types of insurance

by its provision of affordable cover to low-income clients.
228
Reinsurance Reinsurers can serve to diversify the risks that individual insurance
companies cannot offset internally and finally transferring catastrophic risks to
capital markets through the use of catastrophic bonds is another mechanism but
remains an under developed option in developing countries like India.
Commerial Insurance Individual Contracts It is good as it provides individual

coverage against catastrophes. But it comes with the high costs of premium
payouts.
National catastrophe insurance pools

National Catastrophe insurance pools are highly beneficial as it increases
penetration for natural disasters from the current 1-5% to 30-50% over time. It
builds up surplus (equity capital) inside the pools and over time reduces their
dependency on international reinsurers for reinsurance capacity. It reduces
government fiscal liability to natural disasters by transferring risk offshore. It also
brings down the chances of volatility of domestic insurance rates for property
coverage.
Additionally, it is more feasible and viable in the following circumstances :
It is good option when insurance provides low catastrophe penetration. Risk

bearing capacity of Local Reinsurance and insurance companies is low making
the government a rein surer of last resort.
Low frequency/high severity and systemic risks could endanger the financial
being of local reinsurers or the state as actual losses can be devastating in
terms of adverse effect on % GDP and % Annual Government Budget and future
economic growth.

Immediate Post event liquidity is required. It also leads to developing risk
awareness and encouraging better mitigation.
Catastrophe micro insurance

Ideally the Government should be holding the risk as an efficient relief targeting
mechanism, but it may have serious implications because of the limited capacity
of the Government to absorb risks. Catastrophe micro insurance acts as a
complimentary contribution to the Government finances for low probability, high
magnitude disasters. It is good on the following grounds :
It is an effective risk transfer measure in coping with catastrophic risk and also
eases budgetary pressures.
It is a significant tool to cope with low probability and high magnitude looses. It is
a viable means through which small regular payments by poor households can
prevent an unpredictable large loss of income and assets of poor households.
229
27
The provision of insurance to cope with natural disasters can also change the
way vulnerable communities allocate resources, manage risks and will lead to the
growth in investments of higher-risk, higher-return activities.
Micro insurance can break the ‘cycle of poverty’ by providing low-income

households with access to post-catastrophe liquidity, thus securing their livelihoods
and providing for reconstruction.
Reinsurance
It is the method of accessing capital by the insurance industry in order to hedge
against a future catastrophic occurrence. The insurers reduce the possibility of
incurring heavy losses by purchasing reinsurance. The mechanism works as
follows: Primary insurance company pays a premium to purchase a Catastrophe
Reinsurance contract from Reinsurance Company. Reinsurance Company then
sells its bonds in an amount equal to the catastrophe reinsurance contract issued
to insurance company. These are called Catastrophic Bonds. The proceeds
from the bonds sold by reinsurance are then placed in a trust to securitize the
reinsurance contract. Interest is earned on the proceeds placed in the trust. It
was because of reinsurance that Mumbai and Gujarat floods did not have any
significant impact on the balance sheet of Indian insurers as they are protected by
reinsurance cover. 95 per cent of their risks were reinsured under the catastrophic
insurance cover.
Role of insurers in hazard identification and risk prevention and control

Hazard identification
For any industry to be successful, it has become essential to identify the hazards,
to assess the associated risks and to bring the risks to tolerable level. The
insurer may make continuous best efforts to identify the Hazards and to bring the
risk levels to tolerable levels. Risks defined at the various levels matched with

probability level and the case of intolerable, substantial, moderate and tolerable
risk may be fixed.
Hazards spread across areas. Use of periodic surveys, inspections and

observation (both formal and informal), historical data can be made to identify
the various hazards. Keeping track of socio-economic changes, understanding
climatic changes, identifying urban/other concentrations, evaluating existing risk
paradigms, pre risk mapping and predicting future scenarios
Exposure assessment is made on the basis of density/concentration (people/

assets). The higher is the density, the higher is the risk.
Vulnerability (intensity) estimation can be used to calculate damage ratio. Then,

estimation of probable maximum loss (PML) is made. Any good program must
make sufficient provisions for readiness for the unexpected.
230
Risk control / prevention

Once the hazards have been identified and risk assessment has been made, the
efforts must be made to eliminate those risks that can be prevented or avoided
altogether and to control the intensity of the losses. Risk prevention and control
is an effective risk management. Mandatory risk control may be applied in some
areas by the insurers following efforts :
- Enforcement of Land use planning & building code enforcement.
- Strengthening of building codes.
- Compliance with environmental laws.
- Fire prevention rules compliance.
Scope of insuerance contracts

An insurance system operates successfully when many people or business firms
faced with similar exposures transfer their potential losses to a pool, paying a
relatively small premium for the right to collect loss payments from the pool. An
insurance system will breakdown completely when only the most exposed want
coverage. Therefore, private insurers may fail to provide coverage :
Where the loss potential is catastrophic.
The loss potential is mostly restricted to areas most exposed.
The Government at the state and central level has the ability to restrict the use
of loss prone areas.
Those people most exposed or most likely to have claims would be most likely
to purchase coverage.
Generally, the insurance programs provide coverage for the following :
All the catastrophe insurance programs offer coverage for buildings and most
for contents. Coverage for residential buildings and contents against the risk of

natural disasters typically represents the main focus of catastrophe insurance
programs.
Some covers losses due to business interruption.
Some also included provisions for emergency living expenses in the immediate
aftermath of a disaster.
Coverage as a rule bundled with fire/homeowners policy but in certain cases

is sold on a stand-alone basic risk and aggregation at sub-national or national
level prior to its transfer to international reinsurance markets.
Although rates tend to vary insignificantly and in some cases are kept flat, most
frequently they are tied to the nature of the risk and are not subsidized and
generally very high.
231
27
India’s vulnerablability to catastrophic losses :

India is also exposed to a number of catastrophic risks which include drought,
floods, cyclones / storms, earthquakes, tsunami, terrorism attacks, etc. The
most recent catastrophes that happened in India have been Maharastra (Latur)
earthquake (1993) ; Gujarat cyclone (1998) ; Orissa (super) cyclone (1999) ;
Gujarat earthquake (2001) ; Tsunami (2004) ; Mumbai/Gujarat/Bangalore/
Chennai floods ( 2005) ; Kashmir Earthquake (2005) ; Flood Gujarat (2006). As
mentioned earlier that 2008 have been the costliest year in terms of catastrophic
losses. According to estimates of Report of Home Ministry(2008) ‘Nearly 3,500
people lost their lives in the country this year due to floods which also damaged
over 20 lakh houses and led to the deaths of 45,000 cattle. Over 35.18 lakh
hectares of cultivable land have also been damaged due to floods in 21 states
and the Union Territory of Pondichery.’ On 26 Nov, 2008, one of the most violent
terror attacks on Indian soil happened in Mumbai. An unprecedented night attack
was made in the city as terrorists used heavy machine guns, including AK-47s,
and grenades to strike at the city’s most high-profile targets - the hyper-busy CST
(formerly VT) rail terminus; the landmark Taj Hotel at the Gateway and the luxury
Oberoi Trident at Nariman Point; the domestic airport at Santa Cruz; the Cama
and GT hospitals near CST; the Metro Adlabs multiplex and Mazgaon Dockyard -
killing at least 101 and sending hundreds of injured to hospital.The attack was big
bolt to the financial strength of the country. BCCI incurred a loss of Rs 120 crore
due to the cancellation of the Pakistan tour and the two one day matches against
England that was to be held in the month of December. The stock market, both
Bombay Stock Exchange and National Stock Exchange remained closed on next
day. According to Munich Re ‘India ranks 10th on the basis of number of natural
disasters in 2008.’ (See Exhibit 1.2)
Exhibit 1.2. Ranking by Number of Fatalities in 2008


Date Country / Region Event Fatalities Missing
2-5.5.2008 Myanmar Cyclone Nargis 84,500 50,000
12.5.2008 China Earthquake 70,000 18,000
Afghanistan,
January 2008 Cold wave 1,000
Kyrgystan, Tajikistan
India, Nepal ,
15.8-11.9.2008 Floods 635
Bangladesh
18-25.6.2008 China, Phillippines Typhoon Fengshen 557 26
28/29.10.2008 Pakistan Earthquakes 300
8.9.08 China Rock- / Landslide 277
Tropical Storm
August 2008 China, Laos, Vietnam 211 70
Kammuri
24-25.10.2008 Yemen Floods 184 100
25.11-3.12.2008 India, Sri Lanka Cyclone Nisha 180
Source: Munich Re
232
Current funding scenario in India

By now, the Government of India’s means of coping with catastrophic risk has
largely been restricted to relief measures and the finances spent even for relief
has been less than sufficient. A National Disaster Framework has been built
up covering institutional mechanisms, disaster prevention strategy, early warning
system, disaster mitigation, preparedness and response and human resource
development. The expected inputs, areas of intervention and agencies to be
involved at the National, State and district levels have been identified and listed
in the roadmap. To a certain extent mitigation is taken care by Village Disaster
Preparedness Committees (VDPCs).
The current funding has 2 components:

National Fund for Calamity Relief.
NCCF i.e. the National Calamity Contingency Fund.
The NFCR is meant to be used for immediate relief and rescue operations. It is
allocated state wise every 5 years by the Finance Commission. There is also
a yearly allocation made to individual states on the basis of the state public
expenditure. Different States can have State-specific norms to be recommended
by State level committee under the Chief Secretary. Where the calamity is of such
proportion that the funds available in the CRF will not be sufficient for provision of
relief, the State seeks assistance from the National Calamity Contingency Fund
(NCCF) - a fund created at the Central Government level. On receipt of requests,
the requirements are assessed by a team from the Central Government and
thereafter the assessed requirements are cleared by a High Level Committee
chaired by the Deputy Prime Minister. Currently, the amount remaining at the end
of 5 years can be used by the states for planned expenditure.

Apart from Budgetary Allocations, Public Contribution Funds like ‘Prime Minister
Relief Fund’ is also existing in the current scenario.
Prime Minister Relief Fund

It was set up in 1948. The resources of the PMNRF are now utilized primarily to
render immediate relief to families of those killed in natural calamities like floods,
cyclones and earthquakes, etc. and to the victims of the major accidents and
riots. Assistance from PMNRF is also rendered for medical treatment like heart
surgeries, kidney transplantation, cancer treatment, etc. The fund consists entirely
of public contributions and does not get any budgetary support. The corpus of
the fund is invested with banks in fixed deposits. Disbursements are made with
the approval of the Prime Minister. Statement of Income and Expenditure for last
five years is presented in Exhibit 1.3.
233
27
Exhibit 1.3 Statement of Income and Expenditure of PMNRF

(Rs. in crore)
Total Income (Fresh Total Expenditure (Relief
contributions, Interest for Riots, Flood, Drought,
Year Balance
Income, Refunds) B/F Rs. Earthquakes, Cyclone,
522.47 brought forward Tsunami, Medical etc.)
2003-04 (A) 50.48 88.45 444.91
2004-05 (A) 968.78 101.60 1312.08
2005-06 (A) 278.06 109.21 1480.94
2006-07 (A) 144.32 181.89 1443.37
2007-08 (P) 162.16 106.25 1499.28
Source: pmindia.nic.in/relief.htm
Catastrophic insurance in India

In India, to provide insurance, companies must be registered in order to insure
risks within the country (with the exception of marine cargo, which can be
covered based on the terms of sale). Foreign investment in non-life ventures was
limited to 26 percent, recently increased to 49% in Dec, 2008. When insurance
is unobtainable from a local insurer, a petition may be made to the Insurance
Regulatory and Development Authority (IRDA), India’s insurance regulatory
authority, to insure internationally.
Insurance in India for catastrophic risks is more a political-economic issue than

social-economic issue. To date, there has not been a significant insured natural
catastrophe in India.
General Insurance Corporation (GIC) and the major European professional

reinsurers based in Continental Europe and Asia performs the lead role in

reinsurance. GIC Re continues to have the leading presence overall in the Indian
market, providing the most reinsurance capacity for all classes of reinsurance.
Major Risks
Demand for earthquake reinsurance is increasing. India is a seismically-active
region, and is prone to some of the world’s largest continental earthquakes.
However, the frequency of large earthquake events is lower than for other
earthquake-prone countries in Asia, such as China, Indonesia and Japan.
Cyclone is a significant peril in India, and flooding can often follow cyclone
activity. Bay of Bengal is more exposed to the damages of cyclones, although the
tsunami that struck India’s southeast coast in December 2004 emanated from an
underwater quake in the Indian Ocean. Infrastructure projects in rough terrains
and for buildings in crowded urban environments are also exposed to catastrophic
risks. Tea and other crops are prone to hail damage.
234
Availability of insurance
Windstorm insurance is provided in a standard commercial/industrial fire and
special perils policy. Insurance cover for wind losses encompasses losses
resulting from destruction or damage directly caused by storm, cyclone, typhoon,
tempest, and tornado. Flood is also covered under the standard fire and special
perils policy, as are subsidence and landslide - including rockslide (subject to
certain exclusions such as the normal cracking, settlement, or bedding down of
new structures) and coastal or river erosion. Earthquake risk is addressed by
an extension to the fire and special perils policy, and it covers damage following
earthquake and shock. Fire following earthquake can be added. An estimated
half of all commercial and industrial property policies in India carries earthquake
cover. Hail insurance is included in tea crop covers. Insurance for strikes, riots,
and civil commotion (SRCC) is readily available and includes cover for malicious
damage. Terrorism is covered by a pool managed by the GIC, the sole reinsurer
in the Indian insurance market. Local underwriters are prepared to cover terrorism
risk, subject to a surcharge which is passed onto the pool. The pool covers acts of
terrorism, as well as loss and damage caused when a lawfully constituted authority
is suppressing such acts. Fire and special perils policies are also increasingly
popular among home and apartment owners and tenants. These homeowner
policies address fire and numerous additional perils, such as lightning, explosion,
smoke, impact, riots, strike, malicious damage and weather events.
Some specific suggestions for catastrophics insurance

As already discussed, catastrophic insurance is different from other insurance
contracts. Therefore, all countries need to adopt a different strategy for creating
effective insurance solutions against catastrophe losses.
System of insurance

A system of insurance that meets the following requirements will suit the
requirements of the country :
It is affordable and accessible to all kinds of people, including the poor especially
in high risk prone areas. As long as the insurance is voluntary and unsubsidized,
it will only be purchased when it is a less expensive or more effective alternative
to existing risk management strategies.
It compensates for catastrophic income losses to protect consumption and debt

repayment capacity.
It should be feasible to provide given the limited kinds of data available in most
developing countries.
Private sector should be in a position to provide with little or no government

subsidies.
235
27
The deductibles, co-insurance and surcharges should not be so harsh that it

renders coverage levels meaningless. It avoids the moral hazard and adverse
selection problems that have happened most in case of agricultural insurance
programs.
Initiatives by the government and other agencies

Local level of Government can add a small levy to the property tax, which can
be used to buy insurance of the property against catastrophes.· Flat owner’ s
cooperative societies in urban areas must be mandated to recover insurance
premium along with maintenance charges and arrange insurance against
catastrophes. All lending institutions, including, housing loan corporations,
Corporations, Central & State Governments, etc, must obtain insurance or cause
insurance to be obtained, against catastrophes on compulsory basis. Similarly all
house building societies and organizations like Urban Development Authority, City
Development Authority, which are involved in constructions, must be mandated to
insure against catastrophes.
National catastrophic insurance pools is highly recommended

National catastrophe insurance pools should be built up through professional
operations, adequate prudent investment policies, tight restrictions on the use
of funds, and a system of checks and balances embedded in the governance
structure. Government should be financially involved in paying for losses resulting
from catastrophic. It should be ensured that best international industry practices
are used in the pool’s operations and risk management and primary sources of
risk funding.
Ray Spudec (2005) suggests a proposal that envisions three layers of risk-
bearing capacity before the Government events.

Layer 1 : Private Insurers with a few innovations
In this layer, property insurance is supplied by the private markets as it is done now,
with the insurers deciding how much of the risk they wish to retain and how much
they want to transfer to private reinsurers. The first innovation being proposed
is to allow the private insurers to develop reserves against future catastrophic
losses on a tax-deferred basis. The most familiar solution based on this premise
in the U.S. is the National Flood Insurance Program (NFIP) administered
by the Federal Emergency Management Agency (FEMA). In this program,
private companies write flood insurance policies for the NFIP but the program
retains all the risk. It is an insurance program in name only, as the premiums
charged by the NFIP do not by design reflect the actuarial risk of loss for any
particular insurance policy written. Moreover, coverage is restricted. Residential
structural damage is limited to $250,000, commercial property structural damage
is limited to $500,000 and these limits have not been updated since March, 1995.
Contents coverage may be purchased separately, with a policy limit of $100,000.
236
Compliance coverage (Law and Ordinance) is limited to $30,000. Coverage is

mandatory in flood zones.
Layer 2 : Risk Pool funded by private insurers but managed by the State
It is based on state or regional catastrophe funds or pools.
In Switzerland, for example, coverage for all natural catastrophes, except

earthquake, is mandated in property insurance policies. Private insurers as
well as State-owned canon specific insurers, pool these risks together and an
average actuarial rate is determined and charged by all insurers. The markets
and regulatory community have noticed that the Florida Hurricane Catastrophe
Fund did a remarkable job of stabilizing the Florida market and cushioning the
impact of the $22 billion loss from the 2004 hurricane season. While California
has its Earthquake Authority, it has had only limited success in the market, with
only about 13% of property owners participating.
Layer 3 : A National Mega-Catastrophe Fund providing coverage for both

natural and man-made catastrophes
Beyond the second layer capacity created by the state or regional funds is an
overarching national pool for extreme catastrophic losses. This mechanism allows
for aggregate risk pooling of natural and defined man-made catastrophic risks
funded by the set-aside of premium payments in the exposed lines of business
over a phase in period.
In order for an insurance company to participate in the fund, they would have to
establish the tax-deferred reserves. State participation would also require the
establishment of a state or regional fund with a meaningful level of participation.
Amount of funds that could be released to pay losses would vary between natural

and man-made catastrophic events to allow for the maximum use of private
reinsurance, and the fund would have a maximum cap.
Both France and Spain have created risk pools for mandated natural catastrophe
coverage that result in the state assuming the risk on an unlimited basis. With
regard to terrorism risk, France, the United Kingdom, and Spain have programs
that place the risk of terrorist acts with the state on an unlimited basis, while
Germany assumes the risk with a capped ceiling.
World Bank suggested the creation of a China Catastrophe Insurance Pool

that either directly or as compulsory reinsurer, provides insurance for all private
residential dwellings and SMEs for major natural hazards in return for a premium.
This generic model is already used in a wide range of countries and states
(Turkey, California, Japan, New Zealand, France etc) and has been successful.
CCIP shall be.
237
27
A public corporation managed by an independent board of directors with

exemplary insurance industry, financial and related experience. Directors shall be
independently nominated by several government ministries (e.g., MOF, MOCA…),
private industry, and the China National Academy of Sciences.
The fund will be funded through private sources and financially self-sustainable,
and managed according to sound actuarial practices and subject to government
insurance regulations.1
Ex-ante risk reduction by individuals and whole communities.
Established in a timely manner according to a schedule specified by the State

Council.
Strong mitigation measures

Any Insurance proposal must focus adequately on mitigation and must provide
for effective measures to reduce losses. All stakeholders must be included
in mitigation efforts - central, state and local governments, businesses and
consumers, and, most importantly, the insurance industry. The proposal should
promote building and relocation efforts away from high-risk areas.
Area-based index insurance

It avoids the possibility of adverse selection because buyers in a region pay
the same premium and receive the same indemnity per Standard Unit Contract
(SUC), moreover, the insured’s management decisions will not be influenced by
the index contract, eliminating moral hazard. A farmer with hail insurance, for
example, possesses the same economic incentives to produce a profitable crop
as the uninsured farmer. It could be very inexpensive to administer, since there

are no individual and no individual loss assessments. It uses single data on a
single regional index, and this is based on data that is available and generally
reliable.
Micro finance options for insurance

Micro-insurance is the provision of insurance to low-income households. Low
income households pay a small premium for limited coverage in the event of
losses. Micro-insurance offers direct financial risk transfer services and thus
disaster risk management tools to low income households. Micro- finance can
work as an effective tool for selling insurance, either to the group as whole, or to
individuals who might wish to insure their loans. Recent developments in micro-
finance also make area-based index insurance an increasingly viable proposition
for helping poor people better manage risk.
Major insurers and reinsurers should be mandated to expand use of such

schemes.
238
Additional sources of risk could be covered under such schemes.
Trend will drive insurers to make efforts for additional financial risk management.
It will promote capital market
Terror cover
Recent events have proved that terrorism insurance is now must. Companies
end up buying only small quantities of terrorism cover for their fixed assets but
rarely buy a terror policy to protect them against claims from outsiders. For the
risk of terrorism, the German Government has started a scheme where in private
insurers share in a new-venture specialized insurance company that provides only
terrorism coverage. Gains and losses are shared by the participating companies,
with the German government offering only limited financial guarantees. In the
United Kingdom, private companies formed a mutual insurance company
(Pool Re) that provides its member companies with terrorism reinsurance. The
government acts as the residual backstop on an unlimited basis.
Conclusions
Management of catastrophic insurance programs is in one way or another held

accountable to the Government. The Government can act as the aggregator as
it is best suited given its financial ability to handle the scale of operations. If an
efficient method is to be developed, public private partnership is pivotal to cope
with catastrophic risk.
Private insurer can map disaster prone regions, identify the population Below
Poverty Line (BPL) and assess the value of their economic assets. Such type of
risk assessment and risk modeling would help determine the economic loss due
to disasters. It would facilitate accurate premium requirements to compensate for

actual losses.
A part of the funds allocated for relief measures by Government can be used as
the premium amount for insurance cover. Private Insurers should be given the
incentive to maintain tax deferred reserves. During the years when disasters do
not occur, the insurance companies should be mandated to provide a certain
percentage of premiums to the Government for developing infrastructure for ex
ante risk management. Compulsory catastrophe coverage may be enforced.
Though it does not guarantee full compliance, but it is likely to significantly increase
insurance penetration among homeowners compared to other solutions. Strong
mitigation measures are undoubtedly is the backbone of any risk management
mechanism. It can play an important role in the reduction of risk in disaster prone
areas.
239
27
References
Asian Development Bank (2007), Development of Catastrophe Risk Insurance

Mechanisms, Consultant Report, Prepared by Jonathan Hill, Fount, LLC Russell Blong,
Blong & Associates.
Asia Insurance Review (2007), Catastrophe Insurance in Asia.
Bugl, Werner G (2005), “Natural Catastrophe Risk Management Policy in Indonesia”,
The Global Conference On Insurance And Reinsurance For Natural Catastrophe Risk In
Istanbul,Turkey.
Folmer H, Tietenberg T. (2003), International Yearbook of Environmental and Resource
Economics, Folmer H. & Tietenberg T. (Ed.), Edward Elgar Publishing Ltd.
Hogarth R.M., Kunreuther H. (1989), Risk, ambiguity and insurance, Journal of risk and
uncertainty, vol. 2, pp. 5-35.
Kunreuther H. (1996), “Mitigating disaster losses through insurance”, Journal of risk and
uncertainty, vol. 12, pp.171-187.
Kunreuther H. (2002) , “Risk analysis and risk management in an uncertain world”, Risk
Analysis, vol. 22, n°4.
Silaban R, Suprayoga H. (2008), “Catastrophe Risk and insurance availability: Indonesia
case study”, Conference supported by the Asian Development Bank and the Ministry of
Finance, Government of Japan, 4-5 November.
Smolka A. (2006), Natural disasters and the challenge of extreme events: risk management
from an insurance perspective, Philosophical transactions of the royal society, 28 June.
Spudeck R. (2005), “Catastrophe Risk: Creating a Comprehensive National Plan”, Florida
Offi ce of Insurance Regulation, 9 September.
World Bank Good Practice Notes (2008), “Catastrophe Insurance Policy for China”. http://
in.news.yahoo.com/241/20081219/1257/tnl-global-catastrophe-claims-touch-50-
b.html
www.dnaindia.com/report.asp?newsid=1216998
Indian Express, 26 Dec 2008
http://www.gccapitalideas.com/2008/12/15/india-catastrophe-reinsurance-market-2008/
http://www.munichre.com/app_resources/pdf/press/press_releases/2008/2008_12_29_
app1_en.pdf
240

Mav 027 0225

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Mav 027 0225

Transféré par

Droits d'auteur :

Formats disponibles

CATASTROPHIC RISK AND INSURANCE

Management Prospective Ed. | « Management & Avenir »

2009/7 n° 27 | pages 225 à 240

Distribution électronique Cairn.info pour Management Prospective Ed..

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Powered by TCPDF (www.tcpdf.org)

par Vasudeva Sakshi

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

How countries are affected due to catastrophes ?

Resource allocation dor disaster management

Risk pooling and risk transfer

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Insurance as an effective means of risk ﬁnancing

Frequency of Occurrence : Catastrophic events occur relatively infrequently

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Insurance based solutions

National Catastrophic Insurance Pools A country can choose to pool their

Commercial Micro Insurance It is distinguished from other types of insurance

Commerial Insurance Individual Contracts It is good as it provides individual

National catastrophe insurance pools

Additionally, it is more feasible and viable in the following circumstances :

It is good option when insurance provides low catastrophe penetration. Risk

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Catastrophe micro insurance

Micro insurance can break the ‘cycle of poverty’ by providing low-income

Role of insurers in hazard identiﬁcation and risk prevention and control

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Hazards spread across areas. Use of periodic surveys, inspections and

Exposure assessment is made on the basis of density/concentration (people/

Vulnerability (intensity) estimation can be used to calculate damage ratio. Then,

Risk control / prevention

Scope of insuerance contracts

Generally, the insurance programs provide coverage for the following :

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Some covers losses due to business interruption.

Coverage as a rule bundled with ﬁre/homeowners policy but in certain cases

India’s vulnerablability to catastrophic losses :

Exhibit 1.2. Ranking by Number of Fatalities in 2008

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Current funding scenario in India

The current funding has 2 components:

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Prime Minister Relief Fund

Exhibit 1.3 Statement of Income and Expenditure of PMNRF

Catastrophic insurance in India

Insurance in India for catastrophic risks is more a political-economic issue than

General Insurance Corporation (GIC) and the major European professional

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Some speciﬁc suggestions for catastrophics insurance

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

It compensates for catastrophic income losses to protect consumption and debt

Private sector should be in a position to provide with little or no government

The deductibles, co-insurance and surcharges should not be so harsh that it

Initiatives by the government and other agencies

National catastrophic insurance pools is highly recommended

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

Compliance coverage (Law and Ordinance) is limited to $30,000. Coverage is

In Switzerland, for example, coverage for all natural catastrophes, except

Layer 3 : A National Mega-Catastrophe Fund providing coverage for both

© Management Prospective Ed. | Téléchargé le 25/12/2022 sur www.cairn.info (IP: 123.108.92.206)

World Bank suggested the creation of a China Catastrophe Insurance Pool

A public corporation managed by an independent board of directors with