Application of catastrophe loss modelling to promote property insurance in developing countries

Many mega cities in developing countries are exposed to the sources of natural catastrophes, particularly seismic activity. A high level of seismic hazard in some of these places, coupled with a relatively high degree of vulnerability within the built environment, can result in dire human and economic consequences. This paper contains examples of such potentially disruptive factors in relation to Tehran, Iran. It presents preliminary seismic loss estimates for residential buildings in a pilot area of northern Tehran. The paper briefly investigates the effectiveness of risk management measures and loss compensation mechanisms before assessing the feasibility of an insurance‐based risk transfer instrument for managing potential seismic losses among residential buildings in Tehran. It goes on to suggest how probabilistic catastrophe loss modelling can help local insurers to manage their portfolios and facilitate risk sharing among insurance companies and households. Finally, the paper addresses the question of how catastrophe loss modelling can help to strengthen the penetration of property insurance in developing countries.