Technical Report Fiscal Reform and Improved Earthquake Insurance Claims-paying Capacity: Can the Two Coexist? —Attempting to reconcile heightened earthquake risk with sound fiscal policy—

Oguro, Kazumasa  ,  Hiraizumi, Nobuyuki  ,  Owen, Michael  ,  Guo, Jicang

2015-04 , Institute of Economic Research, Hitotsubashi University
From the standpoint of reconciling heightened earthquake risk with sound fiscal policy, this paper performs a simplified simulation analysis of obtainable risk reduction in proportion to reinsurance premiums to explore the potential for improving the claims-paying capacity of Japan’s earthquake insurance program by using reinsurance, which is currently considered the least expensive method for improving risk transfer/claims-paying capacity. We divided the roughly 5 trillion yen of risk that is currently retained by Japan’s earthquake insurance program into 21 layers, starting with four successive layers in the 200 billion yen to 1 trillion yen group and ending with four successive layers in the 4.2 to 5 trillion yen group. We then compared the price of risk (reinsurance premiums necessary for reducing one unit of risk) for the different layers. Our analysis indicated that the four layers in the 1.4 to 2.2 trillion yen group could be reinsured for the lowest price per unit risk. Hence, if these successive four layers were ceded, the reinsurance premiums to be paid under the base insurance premiums to be paid under the base case would be 42.5 billion yen (a 5.31% reinsurance premium rate is applied for ceding 800 billion yen risk), thereby making possible risk reduction on the order of 698.5 billion (99% Tail VaR).

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