World Bank Group Session I: The Current Status of RCIP The International Catastrophe Risk Forum, 4 th Edition Bucharest, Romania The RCIP at a Cross-Roads: Key Challenges and Opportunities Eugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist October 1-2, 2007

World Bank Group Agenda  Envisaged key benefits of RCIP  Case studies of international catastrophe insurance programs  Why getting the premium and deductibles right matters?  Key policy issues and recommendations

World Bank Group Catastrophe risk exposures of selected EU countries Creation of RCIP will enable to reduce the adverse financial impacts of large catastrophic events on national economy Envisaged key benefits of RCIP

World Bank Group Disaster risk financing mechanisms in SEE countries RCIP will reduce government fiscal exposure to catastrophic events and help reduce uncertainty of budget outlays on natural disasters Envisaged key benefits of RCIP

World Bank Group Potential risks and benefits of RCIP Potential benefits  RCIP will increase catastrophe insurance penetration among households and SMEs  Raise risk awareness  Contribute to national risk mitigation efforts Potential risks  Inadequate premiums and insufficient deductibles will result:  (a) in financial insolvency of the program;  (b) create a large pile of debt for the Romanian government/taxpayers;  (c) compromise the reputation of the program with insured and the insurance industry. Envisaged key benefits of RCIP

World Bank Group Agenda  Envisaged key benefits of RCIP  Case studies of international catastrophe insurance programs  Why getting the premium and deductibles right matters?  Key policy issues and recommendations

World Bank Group The US National Flood Insurance Program (NFIP)  Accumulated over $18 billion in debt from the 2005 hurricanes.  Currently financially insolvent and needs to be recapitalized and overhauled at taxpayer’s expense due to:  Inadequate pricing of the risk  Poor accumulation control  Adverse selection problem  100% risk retention, e.g. no reinsurance.  The new the Flood Insurance Reform and Modernization Act of 2007 restores the financial solvency of the program and….adds an optional wind coverage to the current policy! Case studies of international catastrophe insurance programs

World Bank Group Citizens Property and Casualty Insurance Corporation (FL, US)  State-owned corporation  Exposure: $432 billion  Claims paying capacity: $2 billion  Private insurers’ payments following KRW: $39 billion  Current debt of the state of Florida:$22 billion  Expected debt following a Cat. 3+ hurricane:$45 billion  Why?  No reinsurance  Premium is 1/3 of technical cost of risk  Deductibles are too low When the government assumes the risk of catastrophic events, they are putting at risk the livelihoods and quality of life of the taxpayers and citizens they serve.” Frm. State Gov. Jeb Bush Case studies of international catastrophe insurance programs

World Bank Group Agenda  Envisaged key benefits of RCIP  Case studies of international catastrophe insurance programs  Why getting the premium and deductibles right matters?  Key policy issues and recommendations

World Bank Group Expected premium shortfall under a PA20/PB10/D0 scenario TCIP/RCIP PML ratios Why getting the premium and deductibles right matters?

World Bank Group RCIP expected premium rate shortfall at different multiples of premium to risk cost under PA20/PB10/D0 scenario Why getting the premium and deductibles right matters?

World Bank Group Multiples of premium to pure risk under different combinations of rate increases and deductibles PA20/PB10/D5PA20/PB21/D5 Class A buildings2.2 Class B buildings What to do? Introduce a 5 percent deductible for both classes of dwellings Increase rates for Class B by 100% effectively bringing it in line with premium rate for Class B What will that accomplish? Will result in a financially viable scheme Will simplify the pricing by introducing one single rate – 20 euros Will reduce the need to buy billions and billions of reinsurance coverage Why getting the premium and deductibles right matters?

World Bank Group Agenda  Envisaged key benefits of RCIP  Case studies of international catastrophe insurance programs  Why getting the premium and deductibles right matters?  Key policy issues and recommendations

World Bank Group Recommendations “The line between success and failure is so fine that we scarcely know when we pass it: so fine that we are often on the line and do not know it.” Elbert Hubbard  Let’s cross this line in a way that will lead us to success! Key policy issues and recommendations