Cat Risks and Insurance in Iran

Iran is one of the most natural disaster-prone countries in the world. Flood, earthquake, drought, storms could result is devastating damages, casualties, physical and mental damages as well as financial loss to victims. This can change victims’ life and make it difficult or in some cases impossible to get recovered. Historical experiences show that following the occurrence of natural disasters, not only people suffer from the tragic consequences but also governments suffer from the imposed financial pressures. Basically, after a catastrophe, governments often intervene in the compensation of catastrophe victims which causes significant budgetary pressures. Relying on state financial supports within circumstances in which the country faces large destruction of property and loss of life, is not a reasonable solution. Instead, insurance is an appropriate financial mechanism which can efficiently compensate for significant amount of losses. Now the question is, when an insurance product can safely covers a catastrophic event? As I mentioned earlier, catastrophes are associated with huge financial losses. Therefore in order to attract insures’ interest in offering products that cover catastrophes, a high standard and reliable risk assessment is needed. Insurers should have some clear idea regarding the risk type, extent of damages and the estimation over the probable financial loss. For example since 1950, natural disasters caused two insurance companies become insolvent in Canada. We can find other examples in different countries as well. In 1906, an earthquake struck San Francisco through which around 80 percent of San Francisco was destroyed and 12 insurance companies failed. Hurricane Andrew is another example of a catastrophe which happened in 1992, Florida and as a result nine insurance companies failed. In fact hurricane Andrews in 1992 and the Northridge Earthquake in 1994 changed the insurance industry’s view of natural catastrophes. Since then, catastrophe modelling became a fundamental element of almost every insurance company. Basically in case of catastrophes, since they occur rarely, unfortunately we do not access significant historical data and loss information. Therefore traditional actuarial techniques are not suitable. The basic components that almost all recent catastrophic models contain are “Hazards” which roughly speaking is characteristics of a particular risk such as earthquake. “Data exposure” which mainly is the location of each property at risk. “Vulnerability” which quantifies the extent of damages on the property at risk. And finally “Loss” which estimates the financial loss that the property may face based on a given hazard. However it is important to note that it is also critical to come up with a premium which is to some extent affordable for customers.