Earthquake risk financing and possible earthquake insurance options: A case study of Shiraz

Naghmeh Pakdel Lahiji explains that the coping and risk dimensions of earthquakes need to be looked at in combination when feasible risk management strategies are considered for Iran, specifically risk-spreading instruments like insurance.

N.P. Lahiji

N.P. Lahiji

Introduction

Recent earthquakes in Iran have caused huge losses, both in human and economic terms, due to high seismicity and the vulnerability of  structures. To increase the resilience of the risk bearers, including the public and private sector entities, an assessment needs to be made of the resources available to cope with an event and of their interdependencies during the occurrence. Additionally, to work proactively against possible future extremes, the underlying risk must also be determined. This paper attempts to combine both  the coping dimension and the risk dimension, to determine feasible risk management strategies in the Iranian context. The focus is specifically on risk-spreading instruments, such as insurance, for the city of Shiraz. 

Methodology

In this research, the financial vulnerability of society to earthquake losses is estimated  in a quantitative manner to enable financing decisions to be made with respect to future earthquake events. Average Annual Loss of all classes of buildings in district 1 of Shiraz are then calculated. As the government already acts as quasi-insurer by bundling and paying for the reconstruction of its own assets through the purchase of  Excess of Loss (XL) Insurance, it is assumed that they protect their portfolio of assets by purchasing XL [1]. Two kinds of XL-Loss insurance systems are proposed and the risk-based premiums are calculated. Finally, the affordability of household premiums is investigated.

Results

Two kinds of earthquake insurance systems have been proposed that are flexible in structure and can be chosen by decision makers. In these, pre-1991 buildings have more premiums than other group of building classes and under the two proposed earthquake insurance systems are not only unaffordable but also have the smallest critical return periods. Buildings constructed after 2005 in the first insurance system, which is a kind of public-private partnership, do not need to have any insurance coverage, but in the second insurance system are subject to small premiums.

Conclusions

The risk modeling approach has shown the big difference between current premiums and risk-based premiums. This means that the real earthquake risk must be considered in future decision-making and financing processes. The premiums for buildings constructed before 1997 are too high and unaffordable. Thus seeking other approaches such as mitigation measures in order to decrease the underlying risk of this group of buildings and increase the resilience of the households is a subject for ongoing research.

References

[1] Hochrainer S. Macroeconomic Risk Management against Natural Disasters. Wiesbaden, Germany: German, University Press (DUV). 2006.

Note

Naghmeh Pakdel Lahiji, of the Science and Research Branch, Islamic Azad University, is a citizen of Iran. She was funded under IIASA's Petr Aven scholarship and worked in the Risk, Poverty and Vulnerability (RPV) Program during the YSSP.

Please note these Proceedings have received limited or no review from supervisors and IIASA program directors, and the views and results expressed therein do not necessarily represent IIASA, its National Member Organizations, or other organizations supporting the work.


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Last edited: 19 August 2015

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