Catastrophe Risk Trends
in Insurance, finance, and Modeling
By claude Penland
It’s estimated that there Was over $250 billion of economic loss world- wide associated with catastrophes in 2010—only $38 billion of it insured. The cause was a succession of meteorological and geological evils of seemingly biblical proportions: five severe
weather events (tornadoes, hail, severe thunderstorm winds), one major winter storm (snow, icing, cold temperatures, and damaging winds), two earthquakes, and two floods, layered on top of
lesser winter storms, severe weather, flooding, tropical cyclone activity, earthquakes, and wildfires.
an ounce of
subject to systemic weather risk. This diversity makes affordable crop insurance prohibitive and a national cat pool difficult. Even developed nations and their political subdivisions are reconsidering their options. In the wake of Hurricane Andrew in 1992, Florida established the Florida Hurricane Catastrophe Fund. More recently, in an effort to entice global reinsurers to write Florida business, Florida legislators have reduced col- lateral requirements. In Australia, which suffered some $6 billion worth of damage in recent flooding, the government is considering a tax on Australians above a certain income level to help pay for rebuilding the country. When interviewed on a local Australian radio show, Mark Senkevics, head of Swiss Re in Australia and New Zealand, disagreed with that strategy. “We would like to see some form of insurance from govern- ment rather than a levy after the event,” Senkevics told radio listeners.
Looking ahead, the Tropical Meteorology Project at Colorado State University forecasts the 2011 hurricane season will be
exceptionally active. It’s been five years since a major hurricane
has struck the U.S. coast. Are we due? And, more important,
what should we do?
Managing Catastrophe Risk
Catastrophe risk increasingly is on many governments’ radars.
In 2010, for instance, Brazil authorized a $2.3 billion disaster
fund for weather risk and agriculture. The Indian government
was in contact with Swiss Re last year about writing catastrophe
bonds, and according to the Weather Risk Management Association, the Indian weather risk market could grow in several
years from a few hundred million dollars today to $2.0 billion.
“The concept of using weather risk management tools is
being accepted by more and more organizations around the
world,” says Sandeep Ramachandran, director of property and
specialty at Swiss Re.
Countries in the Asia Pacific region are particularly vulnerable
to weather risk. Subject to some of the most devastating catastrophes in the world, many Asian Pacific countries, according to a
recent Guy Carpenter study, also are significantly underinsured
for cat risk. China is one of many countries that could benefit from
a national catastrophe insurance pool but has been unable to reach
consensus on how to go about establishing one. A study of crop
insurance in China that was published by Berlin’s Humboldt University in 2010 cited 17 distinct Chinese agricultural regions that are
Insurance or Investment?
Most catastrophe risk that’s covered by the insurance industry is
still written as traditional insurance/reinsurance, rather than financed through securitization. Because of excess industry capital,
rates for such coverage declined again in 2010. At the beginning of
2011, it was expected that rates would continue to soften, owing
mostly to surplus capital and the absence of large-scale cat events.
Elena Didita, a director at Everest Re who specializes in catastrophe modeling and reinsurance analysis, says there were few
surprises coming out of the January 2011 renewal season.
editor’s;Note: This article was already written and in layout when the March 11 earthquake and ensuing tsunami struck the
japanese coast. Some of the information in the article about the potential for large-scale cat events in 2011 is therefore outdated.
