Tag Archives: Catastrophes

Catastrophe Risk Funding Challenges

Catastrophe insurers and reinsurers will need to develop more secure channels for accessing capital that reflect the potential for future capital market disruptions and implement new risk management measures reflecting the lessons of the current economic crisis and the evolving regulatory response, according to a report by I.I.I. president Dr. Robert Hartwig. The report notes that while financial crises have always posed severe challenges, the capital intensive nature of catastrophe risk funding amplifies those challenges. The global economic crisis that began in the U.S. subprime mortgage sector in mid-2007 spread with remarkable speed and ferocity to challenge the operations of every segment of the global financial services industry, including insurance.   Although the basic function of nonlife insurance—the transfer of risk from client to insurer (and insurer to reinsurer)—continued uninterrupted, the capital intensive nature of catastrophe risk funding has been disrupted more than is generally appreciated. Hartwig notes that primary and reinsurer capacity in the United States and Europe fell by 15 to 17 percent within the first year of the crisis and most measures of capital adequacy continued to deteriorate through early 2009.   Though not presently viewed as solvency threatening, the industry’s ability to quickly attract and retain capital at reasonable cost following a major capital event has clearly been impacted. The report was presented at a conference sponsored by Aon Benfield Australia Limited on the theme of probable maximum loss, frequency vs. severity.

Wildfire Catastrophe Risk

The insurance industry could find itself paying more in claims as wildfires join the growing list of frequent and severe events that have been adding to catastrophe losses in recent years, according to a new report from A.M. Best. It observes that warmer temperatures and drier conditions are making wildfires a year-round affair. While the 2008 wildfire season in the United States wasn’t as severe as in recent years, insurers face the prospect of further property losses from wildfires in 2009 with persistent drought conditions raising the potential for wildfire activity across parts of California, Nevada and the Northwest. A.M. Best reports that when adjusting for inflation into 2009 dollars, wildfire catastrophe losses have averaged nearly $215 million each year from 1964 through 2008. Since 2000, though, annual losses have averaged about $484 million, based on figures from the Property Claim Services (PCS) unit of the Insurance Services Office (ISO). Five of the most severe wildfire events have also occurred this decade, and although the frequency of wildland fires tracked by the National Interagency Fire Center has fallen since the early 1980s, there is an overall rising trend in severity as measured by acres per fire. Check out I.I.I. wildfire statistics.