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ance, which is again legally mandated to accompany natural peril coverage ( GAR 13 paper

Orie and Stahel, 2012

Orie, M. and Stahel, W.R. 2012.,UNISDR Case Study Report., Background Paper prepared for the 2013 Global Assessment Report on Disaster Risk Reduction., Geneva,Switzerland: UNISDR..
Click here to view this GAR paper.

). Private insurance companies that wish to sell these policies are legally required to join an insurance pool called the Norwegian Natural Perils Pool (NNPP). The premium rate is the same for all insurance buyers, as stipulated by the Pool Board that represents all participating companies. The government manages the NNPP, provides reinsurance, and regulates the payout ( GAR 13 paper

Orie and Stahel, 2012

). To avoid moral hazard potentially associated with a universal premium rate, insurance companies are allowed to reduce or waive indemnity if the insured cannot show that appropriate measures were taken to reduce the risk of loss (Ibid.).

PPPs, as in the Norwegian case, can ensure high solvency, high penetration rates, and high amounts of accumulated capital reserves. They can also encourage risk-sensitive investment behaviour for businesses. However, care should be taken to maintain appropriate levels of competition among insurance companies, with the public sector focusing on facilitating and regulating the development of insurance markets based on sound risk assessments and

providing an enabling environment for investments in risk reduction. Moreover, it is in the interest of national governments to use strong partnerships with the insurance sector to bolster its own financial liquidity and ensure fiscal stability during major disasters (see Box 13.5 and Chapter 5 of this report).

13.2

Risk for sale:

insurance-linked securities

Financial markets are now increasing the supply of capital to the insurance industry through insurance-linked securities and similar financial products. This increases competition and the choice of insurance products available to manage disaster risks. However, these advantages may be undermined if asset managers and catastrophe bond issuers favour short-term gains in bond prices over the more sustainable long-term returns derived from potentially more realistic risk analysis.

The capital market around insurance and reinsurance has grown rapidly over recent years (Figure

(Source: UNISDR, based on Artemis Catastrophe Bond & Insurance-Linked Securities Deal Directory^ix )

Figure 13.1 Growth in the catastrophe bonds and insurance-linked securities market, 1996-2012