19 // THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP


ILS Outstanding


120 100 80 60


40 20 0


$ billions Cat bonds Outstanding


$ billions Other ILS Outstanding


e Estimate


Years Source: BNY Mellon, various trade sources


“Where I really struggle is to pin down exactly how the capital will flow in between the different opportunities that are there,” says WCMA’s Dubinsky. “As we look between cat bonds, collateralised reinsurance, sidecars, derivatives and contingent capital – and that’s just in the natural catastrophe space – there are lots of opportunities to grow. And a lot of things are up in the air in terms of what will drive that, such as Solvency II in Europe and Dodd-Frank in the US.”


The overall slowing down of CAGR is explained by the fact that ILS came from a small base. The larger slowdown of growth in cat bonds is explained away by the variety of ILS options now available, for example collateralised reinsurance and sidecars to name but two. That said, BNY Mellon does believe cat bonds will continue to remain attractive both to investors and issuers.


“Governments are the first people who will look for coverage and cat bonds are very suitable for governments – they work really well for them because of the way their capital works and they can use them as contingent capital,” says Artemis’ Evans. “It makes sense for governments and sovereign cat pools to be the people who open up new markets.”


ASIA’S 2011 WAKE-UP CALL


One of the lessons from the 2011 Asia Pacific catastrophes was an underestimation of the potential hazard in this region of the world. The sheer magnitude of the Tohoku earthquake at 9.0 was not something the cat models had predicted. And the secondary characteristics from this quake and the second earthquake in Christchurch in terms of damage caused by tsunami and liquefaction were also unmodelled. At the time, Thai flood risk was a largely ignored catastrophe exposure but ended up costing insurers and reinsurers between $15bn and $20bn.


These events also showed how losses can be magnified in an interconnected world. Supply chain disruption was a big feature of both the Tohoku earthquake and tsunami and the Thai floods, which inundated seven major industrial estates in central Thailand. Producers of PCs and servers were unable to access component parts during the Thai floods and, as a result, the cost of hard drives more than doubled.


“Flooding in Thailand wasn’t given the focus and attention it should have been until the floods took out a significant chunk of the supply chain for the Apple iPhone handset,” says IBM’s Alex Plenty. “It was only through looking at the combination of supply chain contracts (often tied up in legal documents) and combining that with some kind of catastrophe modelling analysis that people actually understand that the risk to business continuity was bigger than they would otherwise have understood.”


$ Billion


2005 2006 2007 2008 2009 2010 2011 2012


2013e 2014e 2015e 2016e 2017e 2018e


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