Pricing Model for Insurance against Earthquake

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PRICING MODEL FOR INSURANCE AGAINST ACT OF GOD PERILS – EARTHQUAKE : 

PRICING MODEL FOR INSURANCE AGAINST ACT OF GOD PERILS – EARTHQUAKE Done at Universal Sompo General Insurance Co. Ltd., Kolkata Nirmoy Dey 0920016 II MBA (A)

OBJECTIVE OF THE STUDY : 

OBJECTIVE OF THE STUDY To analyze the phenomenon of Earthquake and to assess the vulnerability of all Indian districts. To quantify the risk (Earthquake) associated with any domestic or commercial structure in the country. To formulate the pricing model for insurance against Earthquake. To help insurers maintain a balance between competitiveness and profitability. To develop an user friendly interface of the model for easy commercial adoption and implementation.

Impact of De-tariffing on Fire Insurance : 

Impact of De-tariffing on Fire Insurance

EARTHQUAKE PRICING MODEL : 

EARTHQUAKE PRICING MODEL Quantification of Risk 1) Seismic Zone Factor: Zone V: Very High Damage Risk Zone ( MM IX and above).  Zone IV: High Damage Risk Zone (MM VIII) Zone III: Moderate Damage Risk Zone (MM VII) Zone II: Low Damage Risk Zone (MM VI) Zone I: Very Low Damage Risk Zone (MM V or less) TAC Rates for Earthquake

Cont… : 

Cont…

2) Response Reduction Factor (Structural Risk) : 

2) Response Reduction Factor (Structural Risk) “It is the factor by which the elastic responses of the structure, such as base shear and element forces (e.g. axial forces, shear forces and bending moments) generated under the action of the earthquake shaking as specified under the IS code 1893, are reduced to obtain the design values of the responses”. Stronger the building frame system more is the value of ‘R’. Value of ‘R’ is least for a masonry structure and highest for steel or special RCC buildings.

3) Importance Factor (I) : 

3) Importance Factor (I) “It is a factor used to obtain the design seismic force depending on the functional use of the structure, characterized by the risk resulting from its failure”. Risk is associated with hazardous consequences of failure of the structure, its post earthquake functional need, historic value, and economic importance. Two types of buildings-Important building & Ordinary building.

4) Height of the Building : 

4) Height of the Building Load distribution plays a major role for the design of seismic force. The load distribution varies to different levels along the height of the building . If a district is much more vulnerable to seismic intensity, then the risk is going to increase along the increase in the height of the building.

5) Past Occurrences (Frequency Factor) : 

5) Past Occurrences (Frequency Factor) A large part of India is liable to a wide range of probable maximum seismic intensities. There are so many incidences where magnitude of earthquake is less but occurred for more than one time. Past occurrences have been subdivided into three categories of magnitudes e.g. less than 4, between 4 & 6.5 and above 6.5. District wise past 100 years earthquake occurrence data has been collected.

Calculation of Risk & Premium : 

Calculation of Risk & Premium Dwellings, Offices, Hotels, Shops: Manufacturing Stores & Related Units: Earthquake Factor= (Seismic Zone*0.40+Response Reduction*0.30+ Importance*0.05+Height*0.10+Past Occurrence*0.15) Earthquake Factor = (Seismic Zone*0.40+ Response Reduction*0.40+ Past Occurrence*0.20)

Calculation of Earthquake Factor for Dwelling, Offices, Hotels, Shops : 

Calculation of Earthquake Factor for Dwelling, Offices, Hotels, Shops Maximum value of Earthquake Factor: Minimum value of Earthquake Factor: So the maximum value of earthquake factor = (1*0.40+1*0.30+1*0.05+1*0.10+1*0.15) = 1 So the Minimum Value of Earthquake Factor = (0.278*0.4+0.30*0.3+0.67*0.05+0.5*0.1+0*0.15) =0.2847

Weighted Average Earthquake Factor : 

Weighted Average Earthquake Factor Weighted Average = (1*0.75+0.2847*0.25) =0.821 Proposed New Rate =

Risk co-efficient for selected construction in Kolkata : 

Risk co-efficient for selected construction in Kolkata Kolkata is on Seismic Zone II as per TAC standard. Existing TAC rate of earthquake insurance for Kolkata is Rs.0.10%o. So, Calculated earthquake factor for Kolkata = (0.667*0.40+0.37*0.30+0.67*0.05+0.5*0.1+0.08*0.15) = 0.4733 So, the Proposed New Rate = (0.4733/0.821)*0.10 = Rs. 0.057%o Discount Allowed = [(0.10-0.057)/0.10]*100% = 43%

SOFTWARE : 

SOFTWARE

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Recommendations: User friendly software model can be incorporated in the official website of USGI. To enhance the accuracy of the model, empirical study can be done in future. Age factor of the constructions/buildings can be taken as independent factor & can be incorporated in the model. Further Scope: For Earthquake, the return patterns for the natural calamities are not considered. The study can be further enhanced to more micro level. Location or tahsil wise study can be done for more minute details. Multi hazard vulnerability of various Indian districts can be studied and incorporated in the study. Generalization of the software is required, which can be used by multiuser.

Bibliography : 

Bibliography Universal Sompo General Insurance Source Principle & Practise of General Insurance: Institute of Chartered Accountants of India; Committee on Insurance and Pension; Chapter 4 Principle & Practise of General Insurance: Institute of Chartered Accountants of India; Committee on Insurance and Pension; Chapter 6 Annual Review, Natural Catastrophes, 2001; Munich Re Tandon Committee Report 1956. Proposed Draft Provisions & Commentary on Indian Seismic Code IS1893 (Part 1); By Dr. Sudhir K Jain and Dr. C V R Murthy Proposed Draft Provisions & Commentary on Indian Seismic Code IS1893 (Part 2); By Dr. Sudhir K Jain and Dr. C V R Murthy Amateur Seismic Center Earthquake details; asc-india.org IRDA official website Detariffication Of General Insurance And Its Impact on the Profitability of the Companies by Sayak Ghosh Dastidar; A project done in USGI, Kolkata. Indian Plate, Earthquake Hazard And Insurance; By A.B. Pandey, National Insurance Academy, Pune TAC official website

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THANK YOU

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