Abstract
The rapid growth over recent decades of the impact of natural disasters on economies, especially in vulnerable areas, urges stakeholders to promote innovative solutions involving risk transfers that account for the new risk exposures. These proposed solutions are designed to optimize and expedite the indemnification process, which can ultimately be beneficial for both policyholders and insurers alike. This article explores the possibility of supplementing the current Romanian dwelling insurance protection scheme with a parametric mechanism. To determine the triggering parameter of the insurance pay-out, the authors consider various hazard scenarios developed based on historical events. This paper focuses on Probable Maximum Loss (PML) determination computed for events with epicenters in the Vrancea (a region and a mountain in the Carpathians) seismic area. This area is the most exposed in Romania to earthquakes, and it includes the capital, Bucharest, which is the urban area with the highest population concentration and, consequently, the highest exposure to the discussed risks.
Highlights
Parametric insurance has the potential to act as a tool for innovation in the insurance industry as a response to the growing challenges related to the vulnerability of the human communities and their assets to natural disasters
This study examines the opportunity to use a complementary risk transfer solution in the existing mandatory Romanian dwellings insurance system
Since Romania is a country that is significantly exposed to natural disasters, especially earthquakes and floods, in the framework of the project implemented with World Bank support, entitled “Natural Hazard Risk Mitigation and Emergency Preparedness”, the ground was laid for the setting up of a mandatory home insurance scheme against natural disasters
Summary
Parametric insurance has the potential to act as a tool for innovation in the insurance industry as a response to the growing challenges related to the vulnerability of the human communities and their assets to natural disasters. Parametric insurance is used for events related to natural disasters, adverse weather conditions, pandemics (i.e., business interruption) and cyberattacks, which may impact various economic sectors, such as agriculture, renewable energy (wind, solar) and building and construction This modern concept is designed for covering catastrophic risks and has a few particularities compared with traditional insurance. There is a clear trend in disaster risk management, which involves focusing on multijurisdictional coordination by pooling together regional and national risks and creating innovative insurance products covering a larger area of interest This may be achieved by introducing parametric insurance, which in turn may support the enhancement of regional resilience and strengthen the Sustainable Development Goals (Amarnath et al 2021). The purpose of said instrument is to decrease the impact on vulnerable communities, those exposed to earthquake risk
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