During the first quarter of 2013 two natural peril-exposed catastrophe bond transactions closed, for a total of USD520 million of issuance (1). This seemingly low level of primary issuance activity is deceiving, however, as the action in the capital markets and the influence of “non-traditional” capacity (a term that is rapidly approaching obsolescence) has never been higher. Conservative institutional asset managers, the custodians of trillions of dollars of investable assets, have largely accepted catastrophe risk as a component of mainstream investment strategy. And, while it is the case that institutional capital’s pursuit of catastrophe risk has been aided by a low interest rate environment, short-term yield chasing is not the primary driver of the inflows. Rather, this is stable capital that has spent years evaluating the catastrophe risk asset class, looking for both steady returns and, in the aftermath of covered events, orderly payment of losses. It has been waiting to see organized secondary trading activity during live catastrophe events such as Hurricane Irene (in 2011) and, most recently, Superstorm Sandy (in 2012). On all fronts, the catastrophe risk market has demonstrated it is ready to transition from adolescence to young adulthood. The impact has been dramatic; pricing has decreased more than 50 percent year over year, particularly for peak U.S. risks such as Florida, which carry significant profit margin for the traditional reinsurance market.
Posts Tagged ‘Catastrophes’
The extent of rising insured losses from global natural catastrophes over the last 40 years is illustrated below.
Thirty-five percent of insured natural catastrophe losses between 2009 and 2011 were located in Asia while only 33 percent were in the United States. Australia and New Zealand also saw a marked increase in natural catastrophe insured losses during this period, with 19 percent of the total. This is in stark contrast to the long-term trend of more than three-quarters of all insured natural catastrophe losses occurring in the United States.
A fire at a fertilizer plant in West, Texas (about 80 miles southeast of Dallas) sparked a deadly explosion that killed an estimated five to 15 people and injured more than 160 on Wednesday April 17. According to reports, the explosion occurred at approximately 8:00 PM CDT (01:00 UTC). Prior to the blast, a fire was reported at the plant. A reported 50 to 75 homes were destroyed, as well as a 50-unit apartment complex. A nursing home and middle school were also reported to have severe damage. While officials have not determined a cause for the explosion, they do not believe that foul play was involved.
Two explosions in Boston, Massachusetts killed at least three people and injured more than 140 on Monday, April 15. Both explosions occurred in the Boston Back Bay area at about 2:50 PM EDT (18:50 UTC). The blasts occurred near the finishing line of the Boston Marathon, some four hours into the race. One blast occurred near a sports store and the other close to a viewing stand, near 673 Boylston Street at the intersection of Boylston and Exeter. Details around the explosions are still incomplete but the Federal Bureau of Investigation (FBI) has launched a “criminal investigation that is a potential terrorist investigation.”
Two explosions were reported in Boston yesterday. The explosions occurred in the Boston Back Bay area at about 2:45 PM EDT (18:45 UTC), on Monday April 15. The explosions occurred after winners had finished the Boston Marathon. One occurred near a sports store, and the other near a viewing stand near the finish line. Explosion locations were reported near 673 Boylston St, or near the intersection of Boylston and Exeter.
Over the last two years, several powerful earthquakes have caused widespread damage, leading to significant losses for (re)insurers. Four out of the five most costly earthquakes on record have occurred since the start of 2010, and all four of these events were located outside the United States.
A new capital management paradigm is challenging the traditional reinsurance model. Historically, significant market losses from major catastrophic events and low investment yields were a catalyst for an improved rate environment. Faced with current economic conditions, reinsurers are finding it more difficult to generate adequate returns in excess of their cost of capital, and are seeing an increased competitive threat from alternative capacity from the capital markets. New money appears to be more permanent and therefore limits the firmness and duration of any improved rate environment. Catastrophe bonds, sidecars, structured industry-loss warranties and collateralized reinsurance vehicles are among the alternative market options. Hedge funds are also playing a more active role, with a couple of major names setting up reinsurance operations in Bermuda.
Ex-tropical cyclone Oswald tracked over parts of Queensland and New South Wales in eastern Australia between January 23 and January 30, resulting in widespread damage from flooding, severe storms and tornadoes. Floodwaters in some areas reached record levels, causing damage to thousands of properties and forcing widespread evacuations. A number of towns and cities were affected by severe flooding, including Brisbane, Ipswich, Bundaberg and Rockhampton. Bundaberg was particularly badly hit. The Insurance Council of Australia (ICA) has reported an estimated insured loss of AUD290 million (USD302 million) from the event as at 4pm on January 31. The 2013 flood event comes just two years after significant flooding hit Queensland in January 2011, which resulted in insured losses of around AUD2.4 billion (USD2.5 billion).