Earthquake insurance in Iran: Solvency of local insurers in light of the current market practice

. Due to its location in one of the most seismically active regions in the world, Iran has witnessed many devastating earthquakes through history. To finance a part of these losses and reconstruction expenses, earthquake insurance has been offered as a rider of fire policy by the Iranian insurers. This mechanism, if well operated, can substantially contribute to disaster risk management. On the other hand, if the pricing and management of catastrophe risk lack a sound, risk-based practice, it might add to the problems and act to the detriment of disaster risk management. In this paper, we first compare the current earthquake insurance pricing and risk management in the Iranian insurance industry with a state-of-the-art insurance regulation in the European Union (Solvency-II). Then, we examine the consequence of following each approach in terms of business profitability and viability by conducting a numerical analysis on a hypothetical portfolio of property risks in Iran. The results suggest that maintaining the current insurance pricing and risk management techniques in Iran will probably lead to a substantial accumulation of earthquake risk for domestic firms and eventually endanger the solvency of these companies in the event of large-scale earthquake losses in future.