Insuring the Economy: A Risk Management Exercise José Ángel Villalobos Actuary, General Manager Instituto Nacional de Seguros, Costa Rica

Insuring the Economy: A Risk Management Exercise Identification & Analysis of Loss Exposures. Examination of Alternative RM Techniques. Selection of Best RM Techniques. Implementation & Monitoring.

Loss Exposures Cause of Loss. Item exposed to Loss. Consequences of Loss. Identification (Questionnaire, flow charts, financial statements, &c.). Analysis of frequency and Severity.

Loss Exposures Unknown universe of GoCR real property Need of real property inventory. Contingent Liability not considered in the Balance Sheet of the State. A proxy: estimation based on currently insured real property. Costa Rican Law about the need of insure.

Analysis of Loss Exposures Triangle of Heinrich Interested on low frequency/high severity events analysis. Modelling & simulation: a must. Costa Rica Natural hazards: earthquake, landslide, flash floods, volcanism, hydro. CAPRA: multi-hazard model with local knowledge. (RESIS II)

Analysis of Loss Exposure Earthquake is our major concern. INS has been using earthquake models since Deterministic v. Stochastic approach. CAPRA and Integral models/software. First phase: Public buildings and social houses. Second phase: roads and bridges.

Distribution of Insured State buildings and social houses

Model Results Probable Maximum Loss (PML). Pure premium: Expected amount of losses

Insuring the Economy Risk control techniques: exposure avoidance. Loss prevention/reduction. Risk financing techniques: Retention. Transfer (insurance/non-insurance). Combination.

Catastrophe Risk Transfer Vehicle We found as the best option a mixture of some RM techniques: retention for the more frequent events, a Cat DDO (warranted by the GoCR) and risk transfer to the international reinsurance market. This result in a cost effective form to protect the real property of the State and also to increase the penetration of insurance and promote the new free competition insurance market of Costa Rica. Reserves/Capital Reinsurance Trustor: Insurance cos.Beneficiaries GoCR Guarantee Trust (administrat ion & technical issues) Trust Board Insurance Supervisor

Implementation and Monitoring A next step is to include the roads and bridges into the CRTV. The CRTV can be created by a Law. We have a draft and we are promoting the Law. Research must continue at both the industry and academic spheres. Catastrophe model results are uncertain.