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REGULATION OF CATASTROPHIC INSURANCE:
MEXICO
INSURANCE SUPERVISION IN AMERICA
PANEL: NATURAL DISASTERS AND CLIMATIC CHANGE
NORMA ALICIA ROSAS RODRÍGUEZ
PRESIDENT, INSURANCE AND SURETY NATIONAL COMMISSION (CNSF-MÉXICO)
SEPTEMBER 9th, 2016
INSURANCE FOR CATASTROPHIC RISKS
• Seismic activity in Mexico is one of the most relevant around the world.
Therefore in 1999 the CNSF established a regulation for earthquake
insurance in order to estimate the risk premium and the probable
maximum losses (PML) linked to the portfolio of each insurance company.
This regulation has been updated throughout the last years.
• Furthermore, due to a rise in the frequency of hydro-meteorological
events, as well as in the level of assurance in high-risk areas, the CNSF
started in 2004 a project to establish a regulation on insurance for
hurricane and other hydro-meteorological risks, which was implemented
in 2007.
TECTONIC PLATES OF THE AMERICAN CONTINENT
1. North American Plate
1
2. Cocos Plate
2
3. Pacific Plate
6
4. Nazca Plate
3
5
4
5. South American Plate
6. Caribbean Plate
TECTONIC PLATES OF THE AMERICAN CONTINENT
1. Placa
NorthNorteamericana
American Plate
2. Placa
Cocosde
PLate
Cocos
3. Placa
Pacificdel
Plate
Pacífico
Subduction Zone
in Mexico
SUBDUCTION ZONE IN MEXICO
Pacific Plate
North American Plate
Cocos Plate
SUBDUCTION ZONE OF MEXICO
Pacific Plate
North American Plate
Mexico City Area
Cocos Plate
North
American Plate
Cocos Plate
INSURANCE FOR CATASTROPHIC RISKS
Mexico is located in an area with a high incidence of hurricanes.
Hurricane
Odile, 2014
Hurricane
Wilma, 2005
REGULATORY FRAMEWORK
The regulatory framework establishes the following:
Additional Profits
Limit: 90% of PML
Rate
Uses of the
reserve:
Operational cost,
acquisition, profit and
XL coverage.
Ceded claims in case
of insolvency of
reinsurers
Coverage purchase in
case of hardening of
reinsurance
Risk premium
On going Risk Reserve
Reinstallation cost
coverage
Held claims
Catastrophic Reserve
[Long term]
RESEARCH
• Experts from the Engineering Institute of the Autonomous National
University of Mexico (UNAM) conducted extensive research for modeling
the regulatory framework for earthquake, hurricane and other hydrometeorological insurance. The purpose of this research was to obtain
models to estimate:
o Risk Premium, and
o Probable Maximum Losses (PML)
for the insurance policy portfolio.
• The research focused on mathematical models and statistical information
both of Earthquake and of Hurricanes and other Hydro-meteorological Risks
(hurricane, storm, overflow of rivers and lakes, underwater earthquake).
CALCULATION OF EARTHQUAKE PML
REGULATION PARAMETERS IN MEXICO (1/3)
•
The RS-CNSF model applied for the earthquake regulation in Mexico
calculates the Probable Maximum Losses (PML) using the following
parameters:
a) A return period of the event of 150 years.
b) The maximum value of damage that it would exceed, with a 10%of
probability, taking into account all the earthquakes that have the
return period of the given event (150 years), involving a percentile of
90% over the vulnerability curve.
CALCULATION OF EARTHQUAKE PML
REGULATION PARAMETERS IN MEXICO (2/3)
•
This means that:
a) for an event with a return period of 150 years (with possibility to
occur of 1 in 150), and
b) with a probability of 10% (1/10) to exceed certain level of damage,
when that event occurs,
there is a posibility of 1 in 1500 that the estimated damage exceeds the
vulnerability curve in 90%.
•
This estimation corresponds to the «return period of bankruptcy» or
«possibility of ruin».
HURRICANE SIMULATION
REGULATION PARAMETERS IN MEXICO (3/3)
•
Among the most significant elements of the conducted research is the
simulation of hurricanes (path and strength), which was made taking into
account the historical record of the original path of hurricanes that have
affected the country.
•
Hurricane simulation was performed by a disturbance of the original
paths, in order to use the value of the losses caused by wind, flood and
tide, and thus modeling the loss functions.
•
In addition, the vulnerability functions were built to estimate the
simulated losses and, under this context, to model the loss functions by
wind, storm, tide, flood, hail and tsunami. From these functions it is
possible to estimate the Probable Maximum Losses and the Risk Premium
associated with the portfolio of insurance policies of an institution.
EARTHQUAKE SYSTEM AND
HURRICANE AND OTHER HYDRO-METEOROLOGICAL RISKS SYSTEM
•
Based on the reseach conducted by the Engineering Institute of the
Autonomous National University of Mexico (UNAM), two separate
systems were developed, namely two software packages that allow to
perform the estimation of risk premiums (which are the basis of the
Ongoing risk reserve estimation) and the PML (which is the basis for
solvency requirements for these type of risks).
CONCLUSIONS
•
The stability and integrity of the insurance markets exposed to catastrophic risks
largely depends on having technical elements to properly assess the insurance
institutions’ solvency.
o
Technical risk assessment instruments for the measurement of technical reserves and
solvency.
•
o
For risks of low frequency and high severity.
Supervision implications for catastrophic risks in the case of composite undertakings.
• The creation of catastrophic risk reserves is established according to geographical
features and natural risks to which Mexico is exposed.
• The Solvency Capital Requirement considers in its calculation risks of catastrophic
nature.
REGULATION OF CATASTROPHIC INSURANCE:
MEXICO
NORMA ALICIA ROSAS RODRÍGUEZ
PRESIDENT, INSURANCE AND SURETY NATIONAL COMMISSION (CNSF-MÉXICO)
www.gob.mx/cnsf
[email protected]
SEPTEMBER 9th, 2016