Evaluating Claims Costs Arising out of Political Disorder and Civil Unrest

Evaluating Claims Costs Arising out of Political Disorder and Civil Unrest

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Q:\CLIENT\Maher\2000\gm0158cm.ppt

What is this all about?Focussed on the business political and social issuesand how to make a number out of thatHelping people make decisions they didnt think they could makePoint is to enable people to crystalise thinking which often is dominated by irrational fearsThe actuary has a key role

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CoverageWorldwide, most insurance policies excludeMutiny, civil commotion amounting to a popular rising, military risingInsurrection, rebellion, revolution, state of siege, martial lawTerrorism (violence for political ends and violence for instilling fear in the public)WarIn some cases, these losses are covered if they are caused independently from any Government actionWhere cover is required due to the perceived high levels of risk, it is provided bytraditional insurers, with various constraintsspecial purpose insurance vehicles, with greater success and robustness

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Removal of coverage has social/economic implicationsWithdrawal of housing financein areas of perceived high riskusually affects poorer sections moreHindering entrepreneurial activitysmall business withdraw from/do not set up in targeted areasDeteriorating conditions in targeted areaas wealthier sections leaveReduction in foreign investment

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The Rle of the ActuaryPossible exposuresPolicy Limit (US$ billions)Region 1:1.2Region 2:1.5Region 3:2.6Region 4:3.1Region 5:1.0 _____Total exposure9.4Total reserves0.8Reserve is insufficientThe process is stuck

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The Role of the ActuaryThe actuary is able to deal with uncertainties and is not looking for certaintyCan bring external data and rigorous analysis to identify and quantify what could happenConclusion may be The largest scenario we can find is US$0.3 billion.But reserve requirement may be more than that to ensure pool can continue after deteriorationFinancial modelling required

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There has been an increase in major riot and terrorist events in the 1990s

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Chart2

7

0

2

2

1

8

8

No of events

No of major insured events

Sheet1

Year1966-19701971-19751976-19801981-19851986-19901991-19951995-1999

No of events7022188

Sheet1

No of events

No of events on each year

Sheet2

Sheet3


With most insurance claims arising in the UK and the US

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Chart1

7

12

8

Sheet1

UKUSOther

7128

Sheet1

0

0

0

Sheet2

Sheet3


Pools established to deal with this includeOrganisationPool Re

SASRIA

CESCE

IFTRIC

NASRIADescriptionProvides insurance for terrorism-related risks in the UK. It is ultimately government guaranteedProvide coverage for political and labour unrest. Previously was government guaranteed.Provides insurance for political and extraordinary risks on an exclusive basis in Spain. It is government guaranteed.A government-owned insurance company which covers both political and trade risk in IsraelNASRIA is the Namibian equivalent of SASRIA

Pools set up by Governments as commercial insurers view risks as too heavy for them to cover

And provide funding mechanisms for possible reconstruction

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Risk Transfer Mechanism SASRIASASRIA was established following the Soweto riots and the withdrawal of coverage by the domestic insurersReserve increased over the periodBusiness characterised by low loss ratio (20%)SASRIA progressively:reduced premiumIncreased limitExpanded coverageBut perception of risk remained high and reserves continued to expand

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Chart2

2.915

26.716

58.013

60.594

76.026

110.676

250.812

416.77

712.282

988.693

1975.533

2484.762

3243.542

3995.486

5551.233

6198.108

7569.065

8500

9000

8700

R000

Year

R000

Chart1

2.915

26.716

58.013

60.594

76.026

110.676

250.812

416.77

712.282

988.693

1975.533

2484.762

3243.542

3995.486

5551.233

6198.108

7569.065

8500

9000

8700

R000

Year

Rand million

Sheet1

YearR000

197930

1980270

1981580

1982610

1983760

19841110

19852510

19864170

19877121

19889891

198919762

199024852

199132443

199239954

199355516

199461986

199575698

199685009

199790009

199887009

Sheet1

R000

Year

R000

Sheet2

Sheet3


Risk Transfer Mechanism - Pool RePool Re has similaritiesIncreasing surplus, reducing premiums and low loss ratiosPublished surplus understated by accounting conventions

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Chart1

0222.547.6

0345.993.2

4.5195.886.4

29928799

369319125

44617396

Surplus

Gross Premiums

Claims Paid

Calendar Year

million

Sheet1

199319941995199619971998

Surplus004.5299369446

Gross Premiums222.5345.9195.8287319173

Claims Paid47.693.286.49912596

Sheet1

000

000

000

000

000

000

Surplus

Gross Premiums

Claims Paid

Sheet2

199319941995199619971998

Surplus4.505299369446

Sheet3

MBD0010F764.xls

Chart1

47.6

93.2

86.4

99

125

96

Claims Paid

Sheet1

199319941995199619971998

Claims Paid47.693.286.49912596

Sheet1

0

0

0

0

0

0

Claims Paid

Sheet2

Sheet3


What are reserves?Reserves can be largeSASRIA$1.5 billion reservePool Re$1.2 billion reserveBut outstanding claims reserves are smallReserves are established fordeterioration in conditionspossible major eventPool must be able to withstand theseand continue to operateThe difficult question is how large should the reserves be?

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Reserving ApproachModelling Characteristics of eventsIdentification of Key Risk FactorsAnalysis of Historical ExperienceReview of Global ExperienceGeneration of Possible ScenariosDataAnalysis of claims in regionAnalysis of world eventsReports on major situationsStudy of social/economic/demographic/political conditionsInterviews

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CharacteristicsTerrorismSmall group of peopleHighly organisedGenerally focussed on property damagePolitically motivatedRiotLarge group of peopleDisorganised and randomLimited timescaleSocial (political) exclusion main motivatorLabour UnrestSimilar to riots but large durationRequire labour issueLess public participationMay be difficult to differentiate from riotInsurrectionRequires significant political unrest (and retaliatory action)Larger scale durationTypically massive destructionUsually excluded from coverage

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Identification of Key Risk FactorsFactors might beFailure of government to meet peoples expectationswhether reasonable or notFailure of key component of infrastructureFall in the price of important commodity in producing companyPurpose is toUnderstand where things could go wrong in this regionWhich parts of population might be disaffected

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Analysis of Historical ExperienceHistorical experience may give some insightsBut often is of limited valueNo. of incidents

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Analysis of Global ExperienceThe analysis of global events adds significant insightWhat has happened elsewhereWhat could happen here - but what are the differencesDemographicsInsurance buyingProperty valuesConcentrationCausation

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Terrorism and Riots

Brought to 1999 values

Year

Country

City

Present Value Insured ($m)

1992

UK

London

1,447.7

1992

USA

Los Angeles

922.0

1993

UK

London

854.1

1996

UK

Manchester

698.7

1993

USA

New York

687.6

1996

UK

London

686.7

1998

Kenya & Tanzania

Nariobi & Dar es Salaam

508.6

1999

Jamaica

322.0

1998

Indonesia

Medan

255.2

1965

USA

Los Angeles

232.1

1967

USA

Various - esp. Detroit

206.4

1995

USA

Oklahoma City

136.8

1980

USA

Miami

131.2

1968

USA

Washington, D.C.

114.9

1996

USA

Atlanta

105.9

1992

UK

London

90.4

1977

USA

New York

77.4

1990

Trinidad & Tobago

76.5

1967

USA

Newark

74.6

1993

Germany

Weiterstadt

67.1

1968

USA

Baltimore

67.1

1968

USA

Chicago

62.3

1997

Norway

Drammen

36.6

1968

USA

New York

20.1

1981

UK

London

8.3

1984

UK

Brighton

7.9

1993

India

Bombay

5.8

1997

Colombia

Apartado

1.6

Source: Sigma reports with monetary values restated.


Analysis of Global ExperienceFor example

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Generation of Possible ScenariosWhat are areas of potential disturbance?What are the areas of potential damage?

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Identification of major scenarios

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Reserves also depend on policy conditions and reinsuranceCover cancelable/or not?Refusable or not?Limits to cover (cause of loss or monetary)?Limits to cover in the aggregate?Reinsurance will become more expensive when conditions deteriorate(may not be there when needed)Following change in conditions canIncrease ratesReduce limits

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Calculation of Reserve Requirements

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Calculation of Reserve Requirement

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Evaluating Claims Costs Arising out of Political Disorder and Civil Unrest

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