Abstract
This paper investigates catastrophe risk for South African life insurers by considering the additional deaths that could arise from a 1-in-200 year mortality shock. Existing South African academic research on catastrophic risk has mostly focused on property losses and the resulting impact on property insurance companies. Life catastrophe risks have not been extensively modelled in a South African context. Local research would be beneficial in terms of quantifying these catastrophic risks for South African life insurers, and would assist firms when assessing their own catastrophe mortality solvency requirements under the new Solvency Assessment and Management (SAM) regime by providing a summary of data relating to various past catastrophes. In this paper we model a wide range of catastrophes to assess such mortality risk faced by life insurance companies in South Africa. An extensive exercise was undertaken to obtain data for a wide range of catastrophes and these data were used to derive severity and frequency distributions for each type of catastrophe. Data relating to global events were used to supplement South African data where local data were sparse. Data sources included official government statistics, industry reports and historical news reports. Since, by nature, catastrophic events are rare, little data are available for certain types of catastrophe. This means there is a large degree of uncertainty underlying some of the estimates. Simulation techniques were used to derive estimated distributions for the potential number of deaths for particular catastrophic events. The calculated overall shock for the national population was 2.6 deaths per thousand, which was lower than the SAM Pillar 1 shock of 3.2 deaths per thousand for the same population. It has been found that a worldwide pandemic is by far the main risk in terms of number of deaths in a catastrophe and, given that this is the most significant component of catastrophe risk, prior research on this risk in an South African context is summarised and revisited.
Highlights
1.1 The Solvency II Directive (Council of the European Parliament, 2009) is a principlesbased regulatory regime which will apply to insurers in all 27 European Union (EU) member states and is set to be implemented from 1 January 2016
For an insurer with an insured population similar to the national population and experiencing a mortality rate similar to the national mortality rate, the Solvency Assessment and Management (SAM) Pillar 1 shock is 3.22 per mille, which is higher than the rate suggested above
6.2 There may be justification for a mortality shock that is dependent on the socio-economic profile of the insured population and this should be investigated further
Summary
1.1 The Solvency II Directive (Council of the European Parliament, 2009) is a principlesbased regulatory regime which will apply to insurers in all 27 European Union (EU) member states and is set to be implemented from 1 January 2016. The United Kingdom’s Financial Services Authority (FSA) describes Solvency II as “[setting] out new, stronger EU-wide requirements on capital adequacy and risk management for insurers, with the aim of increasing protection for policyholders. Cit.: 51–52) states that all quantifiable risks should be included in the calculation of the SCR, and the capital requirement for each risk module calculated as the 99.5% (1-in-200 year) Value-at-Risk of basic own funds.. Article 104 of the Directive sets out life catastrophe risk as a compulsory sub-module of the life underwriting risk module
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