Earthquake and Natural Calamities in Insurance - Research Paper Example

 Introduction The insurance industry is evolving and ancient approaches on risk management changing. As a means of covering the ever growing market there is need to consider many events and risk related concerns in offering insurance cover to the clients. The recent earth quake in Chile has sparked many questions that need to be answer on how these losses are to be covered and their impact in risk management agenda by organizations. The balance between individual interest and the fundamental requirement for any given firm is what determines the current risk management policies. The firms on the other hand consider the covers being offered expensive and offer alternative measures to cover for the uncertainty related to earthquakes and other natural calamities. The paper will dwell on these emerging trends and will discuss the effect on both the insurance companies and companies tasked with offering insurance cover. The role of the government will be discusses with suggestions being made to all player in an effort of ensuring that the new cover is accepted and works accordingly. The paper is aiming at integrating the government agenda, insurance firms target and business and individual goals in a means of reaching an agreeable conclusion in matters insurance. Literature review The existing rule books have been under debate and efforts to reconsider their impact towards changing trends in the insurance and risk management has proven to be an uphill task. Natural calamities have been the start of major debates among stakeholders. AON risk solution (2013) indicate how there is need to consider natural calamities within and integrate them into insurance policy. The anticipation of natural calamities being inevitable, many companies incurs losses due to non existing laws that guide the provision of insurance cover. According to National Association of Insurance Commissioner (NAIC) (2008) 60 percent of American companies indicated lack of change in the climate risk policies with over reliance of ancient. The anticipated risk associated with natural calamities and its loss magnitude among the insured prompts the companies to reluctantly amend their rule books and adopt the risk into their system. NAIC indicates the liability aspect towards insurance firms which indicates a lack of disclosure filings in these companies. Firms are reluctant to undertake the covers ignorance of the looming danger associated with earthquakes. The cost of damage caused by natural disasters has been massive and overwhelming for insurance companies. The 8.2 magnitude earthquake that hit Chile on April 1 2014 has been is a repeat of similar calamity in 2010 where an estimated loss of $30 billion dollars was registered in property and business (CCN money, 2010). The interval between the two earthquakes has been less than four years. The risk frequency of the risk creates the region as risk prompt area thus insurance companies are left to reluctantly offer cover for the region. The current earthquake according to CBC news (2014) estimated loss of over 25000 homes and unidentified number of property loss. The low return on investment anticipation by insurance drive the insurance companies way and partial cover offered in terms of fire or burglary and the remain aspect neglected. The argument on the proximate cause is considered by the insurance firms before offering compensation. Insurance is about covering the uncertainty but the existing regulations are selective of the natural caused calamities. The rate of compensation is huge and may be overwhelming even to the largest insurance firms. The change in ideology is pushed by the market demand and threat for incompliance from business and potential customers. The existing rules cover uncertainty and decline to account for calamities that affect a given area. The legislative laws provide for fixed rule and are aimed at ensuring unfair completion and collapse of the insurance industry. The key players in the insurance include the insurer, the insured and the government. Each is mandated in ensuring the smooth operations of the industry. Natural calamities on the other hand range in magnitude in that one is unable to estimate the anticipated losses. Risk managers are tasked with duty of ensuring the mark is favorable in investing and the determinant factor remains the area’s risk magnitude and existing insurance rules. Methodology The research involved a look at current calamities and the insurance response. The Chile earthquake will provide the much needed statistic and case study in which the research lays its statistical aspect. The West Virginia insurance laws were used in reflecting on the general rules that govern the industry. The laws where used to give a scenario in which the rule books are subject to change. A survey was done on existing insurance firms and what they offer to the market. The earthquake was used as an example of natural calamities with Chile giving the two earthquakes both of 2010 and 2014 is used was used to assess the effect natural calamities offer to business and indicates the potential investment opportunity. The American federal government was used as a regulatory unit that provided rules and formality. The government was used due to its organization and long history in the insurance industry. Result The existing earthquake covers offer limited compensation as compared to the magnitude of the losses the argument is the indirect losses associated with the natural occurrences. The general assessment nature of the losses is what attributes to the partial compensation by insurance firms. Leurig (2011) indicates the high area falling victims of neglect from the insurance firms. The potential market offers limited interest from the firm’s prompting many risk managers to reconsider other option which include relocation of their firms and offer personal covers rather than insurance cover to their workers in the region. West Virginia Legislative rule insurance commissioner (2002) the insurance firms are offered the mandate to choose when to adjust their policy documents to cater for other emerging issues in insurance. The factor is ignored by many firms with many choosing not to adapt to the trends. The profitability aspect of the trend is what determines the levels of commitment from the two players. The number of risk associated by natural calamities, range from property loss and life loss. The two aspect of insurance indicates more that a single aspect of insurance. An individual and a firm with a single cover may feel unsatisfied by the compensation due to the claim. The policy document may indicate a third part or insure a single bit of the occurred risk. The company may need to reinsure or fail to satisfy each single aspect. The large losses associated with natural calamities becomes a challenge in both risk management and insurance with both considering alternative measures to counter the issue. The risks associated with natural calamities according to NAIC (2008). The climatic changes due to human activities are creating the uncertainty and hinder the anticipation aspect among insurers with most adopting cautionary approaches towards countering the magnitude of losses associated with natural calamity related losses. The uncertainty offers the insurance firms a challenge as insurance is about covering the uncertainty. The simultaneous losses in a given area threatens the existence of the insurance company as the compensation process may prove to be uneconomical and many hider the operation of any given insurance firm with the existing alternative being closure or change in operation. Physical perils and other rising extreme events as a result of climatic and other natural calamities have proven to be the unbecoming in the insurance sector. The result of these risks has been a rise in the pricing by insurance firms. The continuous increase in prices has seen the non players in the insurance industry to adapt new measures in securing their assets as the current policies fail to offer total security for fear of incurring losses. They have adapted long term investment horizons that rival insurance cover. The uncertainty in system risks and the failure by the insurance groups to offer the much needed security has prompted different organizations to adopt internal measures to counter the more expensive nature of insuring their assets. They have opted to adjust their capital rather than to deal with high premiums brought about by the uncertainty and change in systematic risks. The insurance firms have had to deal with a reduced client based and face economic risks as a result of low returns and the overwhelming nature of natural calamities and climatic change. The small insurance group may face the shortcomings related to their sizes. The larger firms have had to embrace innovation and policy adjustments that will balance between the anticipated public response and its key mandate of safeguarding the uncertainty. Discussion The obstacles related to offering earthquake are far more than internal formalities. The three players play part in ensuring that the barriers are overcome while ensuring smooth operation and implementation of the new insurance cover. The obstacle that prohibit the implementation range in nature, legal formalities and other natural consideration are the major concerns amnion the key players. Existing rules only offer retrieve to existing risks and fail to cover the much needed natural calamity cover. The potential market and gain that market posses is what the insurance firms need to consider. The Chile 2010 earthquake saw a losses amounting to $30 Billion. The uncertainty and level of risk involves calls for the insurance market to rethink their investment agenda. The amount of risk calls for the companies to adjust their premiums to attract and encourage more firms to invest in the cover. Assessing risks should be done not through the traditional means but physical risks associated to natural calamities should be considered. The magnitude of the risk may be high but the ignorance fact by the insurance firms is what undermines the whole aspect of securing the uncertainty. Investment into the sector is a two way activity with the insurer opting for a profitable venture while the insured choosing choose one that considers their demands. The stakeholders in the industry fall victim to such calamities with the high losses affecting businesses and their activities while on the other hand offering the insurer a complex task in offering compensation due to the non existing rules and policies related to natural calamities. The federal government role of an intermediary and third party is tasked to gauging the current matter and ensuring that the market offers the right product at any given time. The existing complexity brought about by the emerging trend. The players should consider the feasibility aspect of the program and us the government as a guideline towards offering the right services to its citizens. The unpredictable loss that the calamity brings with it makes the firm guess and wrongly offers premiums to be charge. The result is either intimidation of the clients or effect on the insurance firm in situations where undervaluation is done. The adoption of the new policy offered by the regulatory authority is what defines the general implementation of the policy. The high risk areas needs to acquire a mandatory insurance cover to avert losses associated with the calamities with the government chipping in incentives to ensure the insurance firms work accordingly. Recommendation While assessing the physical risk associated with earthquake and other related natural calamities Insurance firms should change their policy rules and adopt climate and natural calamities disclosure. The risk may seem to be certain but the failure to invest in the line makes investor shy away from these insurances due to their out dated version of risk assessment and compensation. The initial organ that should ensure the policy is a success is the federal government. It should review its laws on insurance and reinsurance to ensure that the insurance firms adapt accordingly to the rising concern in the matters earthquake and natural calamity covers. The measures should expand to cover more a larger market share with prompt hit areas being direct to take a mandatory cover that will secure their interest and safeguard the losses that occur during the occurrences. The business and individuals in these are should seek review of their policy documents to ensure that it covers the losses that result from earthquakes and related calamities. The comprehensive cover each individual takes should be reviewed and a policy document signed according to the looming calamities. The premiums should be regulated by the federal state top ensure the cover is affordable and is in line with set regulations. The players in the implementation of the new policy and cover should consider the current market and the state of the insurer to avoid victimization of the insured and protect the insurance firms from incurring losses hence a balance in the market. The government should offer guidelines to follow as the trend may be a new trend in the market and hence regulation needed to ensure informed decision. The government should be center figure where it will be tasked with monitoring the activities of insurance firms and the same time preventing the insured from intimidation. The insurance firms should review their policy to integrate the new trend. The cover should ensure businesses within the high risk area are not discriminated as they offer opportunities to the firms. By doing so the insurance firms should work with the government agencies as a means of ensuring spreading risk. The process will prevent the firms from the overwhelming state of matters. The reinsurance policy provided by the state agency will ensure the aim is reached and provide a health operational market for the firms. While assessing losses the firms should ensure all aspects of ensuring without singling out on one aspect. Life cover as well as property cover should be integrated into a single cover to avert conflict of interest resulting from unsatisfactory nature for the current policy. The firms should offer reduced premiums to the clients as a means of encouraging many clients to take the cover. The firms should offer financial security for those willing to invest in the high risk area. Conclusion Firms need to re consider their risk management activities. The present of the changing risks and market demand prompts individual to change their perceptive on risk and its management. The insurance firms offer policies and cover on specific events and ignore the main essence of uncertainty. The changing weather and increasing natural calamities are what determines most of the business risk management policies. The compensation rates related to earthquakes are massive and in most cases seam to overwhelm most of the insurance firms with major opting out of these policies. The government on the other hand plays a protective role in the industry offering advice and creating a level playing ground among players and on the other hand encouraging individuals and businesses to take earthquake and natural calamity cover. The main concern from the insurance companies is the mode in which these covers should be undertaking. The value of compensation in many cases may threaten their existence in the market and hence the ultimate choice and decision by the firms is reinsurance. The process ensures the spread of risk ensures the firms to offer the earthquake and other natural calamity cover. Reference AON risk solution. (2013). Global Risk Management Survey 2013. London: AON CBC. (2014). Chile earthquake: How loss of life, damage was minimized. Toronto, CBC CCN money. (2010 February 28) Chile quake damage could reach $30 billion. New York: CNN. Leurig, S. (2011).Climate Risk Disclosure By Insurers :Evaluating Insurer Responses to the NAIC Climate Disclosure Survey. New York: Ceres National Association of Insurance Commissioner. (2008). The Potential Impact of Climate Change on Insurance Regulation. Washington: NAIC West Virginia Legislative rule insurance commissioner. (2002). Series 14 unfair trade practices. Retrieved from Read More