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Earthquake Risk Transfer for Reinsurers

Reinsurers 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 Reinsurers Three Trends
In the past years, the industry faced some headwinds relating to the business model, regulations and internal operations. Here we explore three trends for the upcoming years:

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

Reinsurance Companies Now are 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. Reinsurers 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. As Earling Earthquake Preparedness Alerts issue, primary insurance companies need to manage risks through having access to the highest priority of access to the EPAs. But there will be primary insurance companies that launch reckless marketing campaigns to increase earthquake insurance penetration rates in specified high-risk regions in the Earling EPAs. Hence, the loss of widespread destructions may cost hundreds of millions of dollars, is transferred to the international reinsurance companies during high-risk time windows. To control the new risk factors reinsurance companies need:

  • Data availability in the same or higher priorities
  • New insurance policies make them eligible to monitor primary insurance behaviors during high-risk seismic time windows to prevent probable losses that previously are affected reinsurance companies in the stock price levels
  • Defining a new role as a data enabler for reinsurance companies to enforce data application in insurance companies.
  • 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. Reinsurers partnerships with technology firms to implement big data and analytic strategies create new business models.

    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. 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

    It was a day like any other day on 16 December 2021 until an Earthquake Preparedness Alert was issued by Earling. More than 50 specialists in financial risk received a message on their LinkedIn accounts. Stephanie W in Underwriting Risk & Control and Jeffrey S in Connecting Technology and Capital to Risks to Drive Better Decisions, both in well-known insurance companies, were some of them. It was a golden time for primary insurance companies to manage their risk through (re)pricing, declining new high-risk customers, and pausing marketing campaigns in the under-risk regions in California and Nevada, the two regions where about 85% of the US earthquakes and $25 billion annual risks, and $3.3 billion earthquakes annual loss happening there. But the alert was neglected by primary insurance companies even after the M6.2 earthquake rattled the region on 20 Dec 2021. The December 20, 2021, M6.2 occurred approximately 8 km (5 mi) NW of the April 25, 1992, M7.2 earthquake, which caused significant shaking across northern California, multiple landslides, a rockfall and a tsunami reaching 1.1 meters at Crescent City, California (USGS).

    Legacy reinsurance solutions help primary insurance companies to make mistakes, move slowly, and neglecting new and emerging risks, a defect process that its costs are on reinsurance companies and leaders of the market. It is a real-world, and new normal scenario in the short term. .

    Reinsurance Emerging Market: Scenario

    Reinsurance as a risk mitigation mechanism usage is getting common in a variety of industries. Thanks to new technologies in the earthquake domain, the reinsurance market outlook must revise mainly in the oil and gas industry, when the nature of some risks already is changed in 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 mentioned challenges, Earling can 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 through our global resources.
    • To control the impact of the new normal situation in natural catastrophic events, Earling assists in optimizing and validating NatCat and reinsurance program modeling.
    • Assist in facing insurtechs when they receive a high-risk time window.