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How Can Insurance Regulators and Government Policymakers
manage catastrophe risk?
Managing Catastrophe
Exposures in Mexico:
Country Experience
Manuel Aguilera-Verduzco
President of the
Insurance and Surety National Commission (CNSF)
Contents
Catastrophic Risks
Insurance Regulation
Seismic Risk
Final Remarks
Catastrophic Risks
Catastrophic Risks
Mexico’s geographic situation makes it highly vulnerable to
natural phenomena. Among the most important risks are:
Seismic
Hurricane and Hail - Flooding
Volcanic Eruption
Seismic risk in Mexico
Seismic activity in Mexico is one of the most important
around the world.
Mexico is highly exposed to earthquakes’ occurrences due
to the seismic fault located in the Southeast cost of the
country.
Large earthquakes may cause significant human and
economic losses and, potentially, put insurance companies
in an insolvency position, especially if not proper regulation
is in place.
Therefore, the Insurance and Surety National Commission
(CNSF) recognised the need of a careful technical analysis
of earthquakes’ effects in order to estimate the losses that
may be caused by this kind of events.
Seismic risk in Mexico
The American Continent is divided into six earth fragments:
1. North American Plate
1
2. Pacific Plate
3. Cocos Plate
3
5
4. Nazca Plate
2
5. Caribbean Plate
6
4
6. South American Plate
Seismic risk in Mexico
Mexico is located in a sub-duction region where several
tectonic plates collide.
North American
Plate
Pacific
Plate
Cocos Plate
Earthquakes in Mexico (1908-2003)
Magnitude > 6.5°
Year
Magnitude*
Year
Magnitude*
1908
7.7
1985
8.1
1909
7.6
1986
7
1911
7.9
1989
6.9
1928
7.7
1993
6.6
1928
8
1994
6.6
1941
7.9
1995
7.4
1957
7.7
1995
8
1962
7.2
1997
7.3
1965
7.8
1999
7
1968
7.4
1999
7.4
1978
7.8
2000
7
1979
7.6
2003
7.6
* Richter Scale
Seismic risk in Mexico
The effects of the 1985 earthquake motivated the
development of engineering studies and the revision to
several by-laws:
 New technological developments were used to evaluate
and measure the phenomenon.
 A new Building Code was implemented.
 The EI-UNAM* developed a software in order to asses
the seismic risk of Mexican insurance companies’
building portfolios.
 Adjustments
to the insurance regulation
implemented using new technical basis.
were
* EI – UNAM: Engineering Institute of the Universidad Nacional Autónoma de México (UNAM)
Insurance Regulation
Seismic Risk
Insurance Regulation
The EI-CNSF System provides 2 elements:
 Risk Premium
 Probable Maximum Losses
 It also offers the possibility to compute technical items like
the:
 unearned premium reserve,
 catastrophic reserve, and the
 solvency margin.
Insurance Regulation
 Unearned Premium Reserve
 Is the amount of the unearned premium risk at the time of
the valuation.
 It should be constituted with 100% of the risk premium
(calculated by the EI-CNSF system).
Costs and Profit
Unearned Premium Reserve
Risk Premium
Insurance Regulation
Risk Premium
(RP)
 Unearned Premium Reserve
 It’s calculated by the system requiring a minimum of
(mandatory) information in order to measure a building’s
probability of damage in case of earthquake.
Mandatory information
Mandatory Information
Example: Policy number,
insurance term, insured
value, % of retention,
seismic zone, building
type, etc.
+
Optional information
Optional Information
Example: Postal code,
latitude, use (commercial,
residential, industrial), land
irregularities, walls’ type,
open spaces, building date,
etc.
Conservative quota
Precisely quota
(reduction in the RP)
Insurance Regulation
 Unearned Premium Reserve
 As the premium is earned by the company, the
reserve is released in that proportion and is used to
increase the catastrophic reserve (in a monthly
basis).
Unearned
Premium Reserve
Catastrophic
Reserve
Insurance Regulation
 Catastrophic Reserve
 Is considered as a “long term unearned premium
reserve”.
 It was implemented after the experience of the 1985’s
earthquake.
 It’s accumulation is confined by a technical limit
determined by the Probable Maximum Loss (PML),
calculated by the EI-CNSF system.
Insurance Regulation
 Catastrophic Reserve (CR)
Probable Maximum Loss
Is defined as the total amount of expected portfolio losses
during a single critical event and is calculated by the EICNSF System.
1. Different seismic scenarios
2. Expected loss % for each structure
3. PML for each seismic scenario
4. Average of PML = Technical limit
%
%
Scenario 1
%
%
%
Scenario 2,
PMLA
Scenario 3,
%
. . .
,
Scenario n
Insurance Regulation
Solvency Margin

Solvency Requirement (SR)
The Earthquake SR is defined as:
SR = R1 + R2
Technical requirement
relative to the earthquake
risks retained by the insurer
+
Requirement resulting of
deficiencies in the proportional
risk cession
Insurance Regulation
Solvency Margin
 The Technical Requirement (R1) is defined as the Probable
Maximum Loss (calculated by the EI-CNSF System) of a
company’s portfolio (PMLC).
R1 = PMLC
Retained cumulus portfolio
Insurance Regulation
Solvency Margin
 The Requirement for the reinsurance’s proportional cession
deficiencies (R2) is defined as the percentage of the retained
premiums (PR) that were ceded to non-registered reinsurers*
(PCNR) applied to the PMLC of the company’s portfolio.
R2 = PMLC * (PCNR/PR)
(Non-registered reinsurers index – 1)
* This register is granted by the Ministry of Finance to foreign reinsurers with a
rating higher than: BBB- (Standard and Poor’s and Fitch); B+ or FRP= 5 (A.M.
Best); or Baa3 (Moody’s).
Final Remarks
Final Remarks
The Mexican experience in natural disasters had
stimulated the process of regulation improvement, aimed to
enhance the financial stance of insurance companies.
The Seismic System is an example of the insurance
regulators’ effort for managing catastrophic risks taking into
account the long term financial viability.
Hurricanes’ frequency and severe effects make necessary
the development of new technical basis for their regulation.
Nowadays, the EI-UNAM-CNSF is working out with a
hurricanes’ research, in order to estimate their frequency and
severity.
Our goal is to have a Hurricane System similar to the seismic
one, taking into account Mexico’s specific characteristics.
How Can Insurance Regulators and Government Policymakers
manage catastrophe risk?
Managing Catastrophe
Exposures in Mexico:
Country Experience
www.cnsf.gob.mx
[email protected]