ILS Intelligence
“You quickly recognise that there is this massive shortfall of insurance
mechanisms to close that economic loss gap,” da Victoria Lobo says. The ramifi cations of having large swathes of the population without
adequate insurance coverage can be devastating—both to individuals and in terms of economic stability. It means a delay in people’s houses being rebuilt, businesses reopening and services being brought back on line. All this has a knock-on effect on a country’s economy and often ends up costing the public purse much more in the long run.
Yet mechanisms that enable more people to become insured are
available. For instance, catastrophe pools can be formed to pool risk, in turn making insurance available at a cheaper level and, often, with more comprehensive terms of coverage.
“Catastrophe pools are appropriate for any country or region to handle
sizeable exposures,” says Cory Anger, manager director and global head of ILS structuring at GC Securities, a division of MMC Securities and affi liate of Guy Carpenter.
“Many governments have regulatory requirements that must be adapted for this new type of instrument. In some countries, there is a lot of work
that is required to be done to achieve consensus among all constituents—in some countries, they do not even consider insurance to be a good product.”
She gives several examples, some of which pool natural catastrophe
risks facing several countries. The Caribbean Catastrophe Risk Insurance Facility provides earthquake and hurricane protection to a number of Caribbean countries, while the Japan Earthquake Reinsurance Co. Ltd. provides residential reinsurance across Japan.
“In New Zealand, there is also a pool, which offers similar protection,”
Anger adds. “Even in the US, there are what we would consider to be cat pools, which cover risks that cannot be placed into the voluntary market.”
Catastrophe pools such as these are used for two reasons: to ensure insurance is available to individual consumers and businesses at an affordable price; and by aggregating the risk, to allow for the better management of it in terms of where it is placed and funded, whether that is by governments, in the traditional insurance markets or the capital markets.
36 | INTELLIGENT INSURER | Summer 2011 “Different pools approach it in different ways: some will pool the risk
and then buy traditional reinsurance; some will retain the risk and then fund losses by some sort of assessment post event. Others use their surplus and are then government-backed in how they fund their claims. They all approach it from a slightly different mechanism,” says Anger.
Using the capacity available in the capital markets has become an
increasingly popular way of transferring these risks in recent years through the use of insurance-linked securities or catastrophe bonds. One of the big advantages of this method is that funds are generally available immediately—or at least faster than when dealing with most insurance companies even where there is no dispute over the claim.
This is helpful for governments, which in the aftermath of a major
catastrophe, can often struggle in terms of liquidity and getting cash to the affected areas fast.
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iStockphoto.com / Sonifo
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