Managing Catastrophe Risks of Natural Disasters at the Country Level

1. Managing Catastrophe Risks of Natural Disasters at the Country Level Red Global de Aprendizaje para el Desarrollo Global Development Learning Network PONTIFICIA UNIVERSIDAD CATÓLICA DEL PERÚ Elena Cabrejo de Valle Reinsurance Intendent Deputy Superintendence of Insurance Superintendence of Banking and Insurance Ecabrejo@sbs.gob.pe Lima - Perú

2. 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.

3. 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 attributedto complex process of interactions between the Ocean and the atmosphere because of the abnormalhightemperature of water in front of Ecuador and Perú. Itoccurs during a period of about 4 consecutive monthsbringing about rains, flows and overflow of rivers.

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

5. 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.

6. 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.

7. 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

8. 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

9. 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.

10. 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.

11. 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.

12. 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.