1. Insurance Regulators and Catastrophic Risk Session IX Financing the Risks of Natural Disasters World bank - June 2003

2. Knowledge is Uncomfortable Numerous mega losses have occurred in the last decade Modeling shows that they are more likely than we thought Insurers are underinsured at higher levels Terrorism adds another dimension

3. The problem with people and politicians They cannot deal cognitively with infrequent events They think insurers are good sources of tax revenue They do not understand insurance economics They don’t like insurers anyway

4. The problem with reinsurers They apply heavy loadings to the expected loss at the higher levels Their governments are making it harder for them to smooth pricing They try to make up mega catastrophic losses in a hurry leading to huge pricing swings They are getting choosy

5. Who Pays? Only two possibilities in long run: Policyholders Taxpayers – somewhere

6. What can regulator do? Require that capacity exists to pay all but most extreme events Ensure that capacity is secured Get support from accounting and tax authorities Support development of cat. risk transfer markets

7. Example: NAIC Cat. Reserve Proposal US accounting and tax rules do not recognize catastrophe reserves, although there is an implicit allowance under RBC, but 7 potential events with return periods of less than 500 years are in excess of $15 billion, 4 of which are in excess of $65 billion Total allocated capital is probably less than $200 billion.

8. Results Lack of capacity Transfer of cat. reserves to IRS and shareholders Increased potential for insolvency

9. Proposal Require minimum catastrophe paying ability Can be met through internal funding of tax deductible reserves, reinsurance or issuance of cat bonds Caps set through formula (some flexibility) or subject to actuarial certification Accounting and tax rules adjusted accordingly.

10. Lines proposed to be covered Fire and allied Earthquake Homeowners Farm owners Commercial Auto Workers Comp.?

11. Formula Factors by line and state Applied to net premiums Capped at 20 times current annual contribution Released by roll off after 40 years Can be used to forestall general insolvency

12. Other issues Appropriate return periods Definition of catastrophe for release purposes Interaction with RBC Who ultimately owns tax effective reserves – shareholders, policyholders, government? Pricing approach - affordability Who can certify? Voluntary of compulsory? Global approach to risk or separate issue? Government as reinsurer of last resort.