Catastrophes – Are They Becoming Too Big To Insure? Are Cats Eating Reinsurers’ Lunch?

Over 25 years, Insurance-Linked Securitisation has subtly changed the entire landscape of the (re)insurance industry by uniting it with the capital markets. Each successive year of mega-catastrophe(s) - Hurricane Andrew in 1992, World Trade Center in 2001, Hurricanes Katrina, Rita & Wilma in 2005 - has been a game-changer for the (re)insurance industry, requiring large amounts of new risk capital to be raised. This new capital has arrived in a variety of forms, (a) repairing the balance sheets of existing (re)insurance companies, (b) forming new (re)insurance companies, and (c) increasingly through various forms of Insurance-Linked Securitisation (ILS). ILS structures place (re)insurance risk directly into the capital markets, and now represent around 15% of the capital in the reinsurance market. The most visible and successful form of ILS are Catastrophe (Cat) bonds. From the first public cat bond incepting on 1 January 1997, there are currently now over $100 billion of cat bonds in issue. The early Cat bonds mainly financed property damage from natural perils (hurricanes, typhoons and earthquakes), but Cat bonds have now been issued covering a wide range of non-catastrophic property perils, as well as other casualty and life & health risks – even including pandemics. One key innovation underlying this growth has been the introduction of non-indemnity event definitions, particularly parametric ‘triggers’. At the other end of the scale, parametric triggers have aided the development of micro-insurance. The history of cat bonds is covered in Alan Punter’s new book “A Celebration of 25 years of Insurance-Linked Securitisation through 25 Landmark Deals”. This seminar will describe the basic structure of a Cat bond and illustrate how Cat bonds have developed and evolved over the past 25 years to become endemic in the (re)insurance sector – particularly as the traditional reinsurance market has appeared to reduce its appetite for ‘peak’ risks, as climate change, social inflation and financial inflation have all increased the frequency and severity of insured catastrophes over recent years. The cost of Hurricane Andrew in 1992 to the (re)insurance industry was around $16 billion; the cost if Andrew was repeated at today’s values has been estimated to be over $60 billion – a figure that the 2022 Hurricane Ian appears now to be validating. Watch the webinar here - https://fsclub.zyen.com/events/past-events/catastrophes-are-they-becoming-too-big-to-insure-are-cats-eating-reinsurers-lunch/