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Finance and Credit
 

A methodological approach to determine a rate of insurance against natural disaster risks

Vol. 21, Iss. 9, MARCH 2015

PDF  Article PDF Version

Available online: 28 February 2015

Subject Heading: Insurance

JEL Classification: 

Pages: 56-60

Voskanyan L.R. State University of Management, Moscow, Russian Federation
lilit.voskanyan1986@gmail.com

Currently, insurance against natural disaster risks in the Russian insurance market is covered within general property insurance. However, natural disaster risks are underestimated in the structure of general property insurance. One of the reasons is the absence of insurance rate specification and methods of its determination. Due to the fact that the property insurance tariff structure does not distinguish the rate of insurance against natural disasters, the probability of occurrence of the insured event (natural disasters) is not taken into account. Another key reason for the lack of separate insurance against natural disasters is non-availability of methods to determine the rate of insurance. It is impossible to apply the traditional method of determining rates of insurance against natural disasters risks on the basis of statistical data on losses in past years as such risks are rare, and losses resulted from the attachment of risk are huge. Therefore, the rate of insurance against natural disaster risks should be based on the calculation of potential loss. This article describes the method of calculating the rate of insurance against natural disaster risk based on the method of potential loss estimation as a result of loss occurrence. The proposed method takes into account such factors as probability of natural disaster occurrence; number of houses (households) in the area that is prone to natural disasters; the degree of property destruction depending on the power of the event; average cost of property per one household. This method serves as a basis of catastrophic events modeling. Insurance companies may apply the method to determine the cost of insurance against natural disaster risks.

Keywords: natural disaster, catastrophe, risk insurance, probable loss, average annual loss, gross premium, net premium

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