Earthquake Risk Transfer for Reinsurances

Reinsurances Natural Disaster Risk Management Action Plan

From a global perspective, reinsurance remains to have a distinctive business model compared to traditional insurance companies. It comes with its own characteristics and challenges. Internal reinsurance vehicles seeking for opportunities to align with corporate strategy. External reinsurers are, in a tempestuous environment, looking to improve solvency capital diversification effects and regulatory arbitrage hence increased focus on alternative markets.
The Reinsurances Three Trends
In the past years, the industry faced some headwinds relating to the business model, regulations and internal operations. In this article we explore 3 trends for the upcoming years:

  • Catastrophic loss event impact;
  • Emerging technologies;
  • Increased in involvement in InsurTech.

Reinsurances at Risks of their Partners

Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. Reinsurances are very helpful to transfer risks in major events. Finite reinsurance risk transfer much more is using by governments as they willing to transfer risks to the international insurances now that new technologies can detect the high-risk time windows. Hereby, as an Earthquake Preparedness Alert issued while most of the time an expected event appears days in advance, insurances can launch reckless campaigns to increase earthquake insurance penetration rates in the defined high-risk regions. Hence, any widespread destruction risks that can cost hundreds of million dollars, transfer to the international reinsurance. It is a solution to raise the capital needed for recovery instead of foreign loans or tax which would impact residents.

Emerging Technologies

The adoption of emerging technologies offers opportunities to innovate and develop new insurance offerings with enhanced customer oriented focus, improved operational processes and assess risks arising from products and portfolios.

Reinsurances are partnering with technology firms to implement big data and analytic strategies. New business models are explored and often combined with partnerships and investments in InsurTech.

Parametric Insurances

Parametric reinsurance market update is changing rapidly. Pre-agreed payment for a claim is guaranteed upon the occurrence of a triggering event, which needs to be a pre-defined parameter or metric related to the insured’s particular exposure. It is impossible to predict when the next seismic event will occur.

Traditional insurance solutions often only provide financial relief following a lengthy claims settlement process, leaving companies and organizations with cash flow problems. Besides this, there are often significant gaps in coverage especially for costs associated with the event.

Earthquake parametric insurances close these gaps with a tailor-made solution characterized by an unprecedented level of transparency and a very simple payout process.

The new parametric trigger cover is specifically designed for seismic events. Most of the parametric insurances are highly customizable and allows you to pre-defined triggers and payout amounts up to US$ 10 million (or higher on request) per location or defined area. For example, a parametric insurance policy can cover an earthquake with 7 Mercalli intensity scale, up to 200 kilometers from the capital, in 10 days, to payout for power grids, water supplies, airports, schools or any other infrastructures. As any insurance policies have their own payout, damages for most of the critical infrastructures can follow by the insurer's compensation which can be hundreds of millions USD.

insurance industry emerging risks; solutions

Fig.1 - Earthquake Preparedness Alerts helps insurers to auto reject or auto approve new customers even during the high-risk severe ground conditions time window.

Reinsurance Emerging Risks: Scenario

Earling issues an EPA and defines a high-risk region. The alert delivers through email, beside a back-end platform, which delivers the alert to Decision Support System and triggers a predefined process known as Earthquake Preparedness Action Plan. Some of the earthquake insurances compensate up to $50 million USD. So, they shouldn't sell recklessly. Therefore, the role of the action plan is applying a risk management procedure to face enormous high-risk new customers willing to transfer their risk on each high-risk situations.

Reinsurance Emerging Market: Scenario

Reinsurance as a risk transfer mechanism usage is getting common by variety of industries. Thanks to the new technologies, in the earthquake field, reinsurance market outlook must revise especially in the oil and gas industry as nature of some risks are changed to reinsurance emerging markets.

High Risk World Map

How we can help?

In general, Earling has a global seismic monitoring network and specialists that are subject matter experts. Regarding the challenges mentioned above, Earling is been able to deliver support.

  • In the pressure on profitability, performance management and key performance indicator settings.
  • In the entrance of parametric insurance markets and issuing alternative products, Earling can deliver independent advice by our global resources.
  • To keep control on the impact of catastrophic events, Earling can assist in optimizing, validating on Cat and reinsurance programs modelling.
  • Assist in facing InsurTech, when they noticed about a high-risk time-window.

Next Step?