The Game Scenario
Welcome to CATalonia!
No, not Catalonia in Spain, this is CATalonia.
CATalonia is an imaginary island nation located in the Sea of Lusitania. The land is
heavily and uniformly populated near the shoreline. There are ten concentric streets that
encircle the island: Avenue of the Sea, which is closest to the water, then, next inland is
2nd Street, followed by 3rd Street through 10th Street. There are no settlements beyond
10th Street, only the central mountain, which is covered by a dense, uninhabitable jungle.
The properties closest to the sea are the most desirable, and many of the magistrates and
deputies (the administrators of the local and national governments) live there.
There are four provinces in the nation: Spades ( ), Hearts ( ), Diamonds ( ), and Clubs
( ). The provinces are separated by broad bays. Each province has the same land area
and population. The climate and weather history of the provinces are similar, but
independent of each other. There has never been an insurance loss occurrence that
involved properties in two or more provinces. Fires are common, but they have never
damaged properties on more than one street, and have historically only damaged 50% of
the values.
Tropical stones (the dreaded Lusitanic Cyclones) are only 30% as frequent as fires, but
more widespread. Each province is equally exposed to cyclones, and in the past they have
damaged everything between the sea and the points where the cyclones lost their power,
due to the increasing altitude of the land. Scientists have identified three, equally-likely,
classes of cyclones based on the speed of their winds and the extent of their destructive
power.
- "Class J" – Least powerful, only damages buildings within three blocks of the
ocean. Only partial damage on 2nd and 3rd Streets.
- "Class Q" – Total damage on Avenue of the Sea and 2nd St. Partial damage
through 6th Street.
- "Class K" – Most powerful cyclone. Total damage through 3rd Street. Partial
damage in the remainder of the province.
An individual insured property can only be destroyed by one fire or cyclone per year.
However damage can accumulate. If there is a loss in an area due to a fire or Class J
cyclone early in the year, a Class K cyclone later might destroy the remaining properties.
It will not destroy anything that was already destroyed.
Scientists calculate that there will be ten insured events, fires or cyclones, each year. No
event can occur twice in a year, but each is equally likely to recur in subsequent years. A
detailed analysis of the catastrophe exposures follows this summary.
The four provinces have their own local governments and administer insurance tariffs
independently of each other. An insurer-controlled bureau has developed and submitted
the current tariffs to each of the four provinces.
While insurance companies have the right to develop their own individual rates, they
currently do not do so. The current rating law provides for premium changes at the
beginning of each year under two rules:
- An insurer may reduce its premium rate in any of the provinces, for any reason.
- If an insurer had a loss ratio over 100% in a province in the prior year, it may
raise its rates for that province to any number it desires up to 100% of values.
In the interest of social equity, the magistrates of the provinces have required exactly the
same tariff premiums for every insured property in their province. If an insurer develops
its own tariffs, it is required by law to advise its competitors of its rates each year.
Insurers are also required to offer renewal to all of their current insureds at their latest
approved provincial tariff prices. However when competing for new business (currently
insured by a competitor), insurers are free to exercise underwriting judgement (i.e.,
choose which risks they wish to insure). For example, an insurer could legally reduce its
prices by 20% below the existing tariff in order to attract business, but also decide not to
add new exposures located on the three streets closest to the sea. Each insurer must accept
all customers that are willing to pay their tariff premiums and that meet their published
underwriting standards.
There are five-independently managed insurance companies. Each company is licensed to
sell insurance in all four provinces. Each company currently has 3.000 points in capital.
(The local currency is the Lusitanic Point. Symbol: $.) National law allows insurers to
write net premiums each year equal to their beginning-of-year capital.
National law also requires residents to purchase insurance protecting against both fire and
cyclones. The residents have banded into forty different groups that buy these policies for
their members. There is one buyers' group for each street in each province. Each group
includes exactly 1.000 points in insured values at the beginning of each year. Property
damaged during a year is only rebuilt at the end of the year.
If a buyers' group's current insurer is the only one that offers to sell it a policy, then the
group will renew its current policy at the insurer's latest provincial tariff premium. If
another insurer offers a policy to a buyer's group at a tariff that is 15% or below the
current insurer's latest tariff, then the group will move its insurance to the lowest-priced
alternative insurer.
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