A Study on Financial Risk Transfer in National Storm and Flood Insurance Program

A Study on Financial Risk Transfer in National Storm and Flood Insurance Program

The Korean government introduced National Storm and Flood Insurance Program (NSFIP) in 2006. A large portion of insurance premium is subsidized by the government, and the government promised to offer compensation for the insurer’s loss if the loss ratio exceeds 200%, which has become threat to financial stability and sustainability due to recent occurrences of severe weather events. Therefore, it is urgent to find a solution to secure the financial stability of the insurance program. This paper analyzes the correlation between the claim amount of the NSFIP and the amount of actual damage to estimate government’s future financial risk. The result shows the possibility of an astronomical amount of money for the compensation by the government. In order to find solution to reduce this risk, this paper compares several alternatives, and concludes that the purchase of the reinsurance program seems to be the most effective and feasible solution.