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


One aspect of big data that is poised to make a dramatic impact on analytics and data insight is the concept of the “internet of things.” This refers to the increasing use of sensors to capture detailed (and sometimes real time) information about processes and systems, both virtual and physical. A sensor can be a physical device that reports back information about its environment, such as a GPS tag that reports the movement of a package through a distribution system. Or a sensor can be software based, reporting on the performance of a computer system. In either case, the volume of data generated by these sensors can quickly overwhelm traditional data processing systems. But by applying big data solutions, firms can capture, analyze, and derive insights from this sensor- generated data.


Based on its development to date it is likely that a few pioneering transactions is all it will take to build momentum for a more broad and diverse cat bond market in the future. From earthquake risk in China and California to energy, aviation, workers’ compensation and longevity risk, tomorrow’s range of catastrophe securitisations will be fascinating to watch as they are put together.


With a little innovation and willingness to embrace big data and new underwriting approaches, the cat bond sector has untold ability to transfer underinsured global catastrophe risk to the capital markets. This untapped opportunity is a vital social imperative in a world where catastrophes are becoming more extreme and societies increasingly vulnerable.


GEM (Global Earthquake Model) is creating a database (OpenQuake) of the fragility of every building on Earth, a global earthquake catalogue for the past 1,000 years, and a map of every known active fault. Could the capital markets, governments and supranationals come together to harness the power of GEM’s OpenQuake? No. Could those same participants, in partnership with the insurance industry offer much needed cover to developing nations? Yes.


This new alternative capital has increased competition and lowered the cost of insurance. This lower cost of insurance should encourage previously underinsured emerging markets to look again at the value of catastrophe insurance.


Growth in the penetration of emerging markets will require the harnessing of two forces. Firstly, the marrying of catastrophe models to big data to allow insurance companies to much more accurately predict the economic consequences of a catastrophe and in a more timely manner. Secondly, insurers and reinsurers to challenge their current operating models, finding ways to embrace ILS to open up new markets whilst allowing them to deploy their own capital alongside new capital in these emerging markets in a prudent fashion.


A real partnership between nation states, insurers and the capital markets offers the financial services industry an opportunity to demonstrate its positive contribution to society.


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