2 // THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP
THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP
TABLE OF CONTENTS Foreword: A Leap of Faith
2 4 5
6 Chapter 2: Mind the Gap 10
Chapter 3: Bridging the Gap – Working with Governments – Barriers to growth
12 17
Chapter 4: Closing the Gap – A bright future
FOREWORD: A LEAP OF FAITH Executive Summary About BNY Mellon
The time has come for the insurance industry to acknowledge “alternative capital” (capital from outside the insurance industry which is now backing insurance risk; for example from endowments, pension funds or hedge funds) is here to stay, and as a consequence, the debate must move to one which explores how the industry and society can benefit from this capital.
Chapter 1: Spot the gap – US Natural Catastrophe Focus – Opportunity and Challenge
BNY Mellon acts as trustee, paying and collateral agent on both public and private insurance-linked securities (ILS) structures. For example, in the public catastrophe (cat) bond market we act as the trustee on more than 65%1
of issues.
Issuers and structurers like our credit rating, our deep experience and expertise, and our independence.
We believe that within five years public cat bond debt outstanding will have reached the $50bn mark. Total ILS will be a multiple of that.
ILS is an efficient mechanism for the capital markets to gain exposure to the insurance industry. The low interest rate environment has encouraged investors to look more closely at ILS. We believe that even when interest rates normalise, allocations of institutional investors such as pension funds in ILS will continue to increase because of returns over the London Interbank Offered Rate (Libor) and for reasons of diversification.
Insurers must shift their mindset that returns are only generated by deploying their own capital. We think the tipping point will come when big data (loosely defined as the exploitation of voluminous, fast changing and unstructured data) allows insurers to deploy their own capital and third party capital against new risks. Anticipating the location and size of future earthquakes is still an inexact science, however big data can capture the fragility of buildings and identify areas at risk from future earthquakes and shaking damage.
Dedications 22 1
68% market share of CAT bonds issued in 2012, BNY Mellon data matched against market data from
Artemis.bm
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