Regional Underwriting In Central America

REGIONAL ANALYSIS – JUSTIFYING REGIONAL UNDERWRITING POLICY IN CENTRAL AMERICA
One of the main causes of the reduction of insurance of property and increased retention rates has been the movementobserved in recent years towards the creation of a common market. This has allowed the direct insurers to sign business in various countries of Central America, generating a market composed of fewerinsurers as a result but more regionalized that they align themselves with more diversified portfolios.
For catastrophic risks in particular, this regional diversification can help an insurer to reducethe amount of economic capital required to support its premium basis. It also impacts the cost of reinsurance: a catastrophic program regionalized, for example, can be cheaper that the sum of separatecountry programs. This is because the overall limit is likely to be less than the sum of the individual programmes. In addition, it applies a load of capital below the regional contract compared tothe sum of the burdens of individual capital in programs by country, especially on areas among those of highest exposure.
Other benefits of being a regional insurer are having a larger capital baseand a higher premium basis in relation to costs.
Another factor to be considered significant is the loss ratio. Despite the occurrence of several catastrophic events, losses insured in the regionduring the last decade have been relatively moderate. When we consider this fact in combination with the above-mentioned benefits generated by the regionalization, it is not surprising that Central Americainsurance market is in a strong financial position which in turn produces the significant fall in the level of rates in insurance of property and the tendency to increase retention and to yield fewerpremiums to reinsurers.
PML estimations should consider the following:
* Losses caused by natural perils in the region
* Market practices per country
* Multi country loss scenarios...