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Global Assessment Report on Disaster Risk Reduction 2013
From Shared Risk to Shared Value: the Business Case for Disaster Risk Reduction |
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Global Assessment Report on Disaster Risk Reduction 2013
From Shared Risk to Shared Value: the Business Case for Disaster Risk Reduction |
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Notes
i Moral hazard is a case where insurance buyers become less risk adverse owing to the coverage purchased. Adverse selection arises when risk–seekers are more likely to buy insurance than risk-averse individuals, potentially hiding real levels of risk.
ii The regional approach was initiated with support from the Global Environment Facility, the Swiss government, UNISDR and the World Bank. iii http://www.economywatch.com/world_economy/china/structure-of-economy.html iv When assessing risks, any insurer or reinsurer must take into account the fundamental principles and limitations of insurability. Insurability is not a strict formula, but rather a set of basic criteria that must be fulfilled in order for a risk to be insurable. Disregarding these constraints ultimately jeopardises the (re)insurer’s solvency and its ability to honour its policy obligations. However, the strict criteria required for insurability can mean that certain exposures may remain uninsurable. Some basic principles considered include randomness of the event, quantifiable events and losses, mutuality of risk, and economic viability. For more information see: http://media.swissre.com/documents/The_Essential_Guide_to_ Reinsurance_EN.pdf v http://www.jetro.go.jp/world/asia/th/biznews/4f7d27132e248
vi http://www.jetro.go.jp/world/asia/th/biznews/4f7d27132e248
vii Luca Albertinie, CEO, Leadenhall Capital Partners LLP in Aon Benfield 2012a: p.42; and http://www.artemis.bm/deal_directory viii Catastrophe bonds are high yield bonds that contain a provision which may cause the principal or interest payments to be delayed or lost to investors in the event of a specified loss such as a hurricane or earthquake (OECD, 2011 OECD (Organisation for Economic Co-operation and Development). 2011.,Future Global Shocks. Improving Risk Governance., OECD Review of Risk Management, OECD Territorial Reviews., Paris,France: OECD.. . ix http://www.artemis.bm/deal_directory x Niklaus Hilti, Head of Insurance Linked Securities, Credit Suisse Asset Management in Aon Benfield 2012a:p45. xi http://www.riskandinsurance.com/story.jsp?storyId=124326385 xii http://www.riskandinsurance.com/story.jsp?storyId=124326385 207
comprehend and is rarely disclosed to them xi owing to over the counter transactions of products (see Chapter 12). There are, however, signs of change, with information being provided to investors at a higher level of disaggregation (Aon Benfield, 2012d
Aon Benfield. 2012d.,Insurance-Linked Securities. Evolving Strength 2012., Aon Benfield Securities Report., Chicago,USA: Aon Benfield Securities.. . In February 2011, leading catastrophe modeller Risk Management Solutions (RMS) released a new version of its US hurricane risk model that significantly revised upwards the probability of hurricane risk. As a result, several US hurricane catastrophe bonds priced using the RMS model were downgraded as concerns of their profitability in light of the new model’s results grew. Bond issuers began pricing new bonds on the risk models of competitor AIR Worldwide (AIR), which estimated lower probabilities (Aon Benfield, 2012d
Aon Benfield. 2012d.,Insurance-Linked Securities. Evolving Strength 2012., Aon Benfield Securities Report., Chicago,USA: Aon Benfield Securities.. . This highlights the tendency of asset managers and bond issuers to favour short-term gains in catastrophe bond prices over the more sustainable longterm returns derived from potentially more realistic risk analysis. RMS has since been forced to market its revised model in a more comprehensive ‘Resilient Risk Management’ strategy that raises awareness about exposure not only to hurricanes and
earthquakes but to uncertainties in the catastrophe models (Ibid.).
Leading risk modellers, including AIR, are now committing to provide longer-term risk analysis in addition to medium-term perspectives on potential losses by improving the use of historical data and future projections in their risk models. Several industry leaders have highlighted the need to make explicit the uncertainties associated with commercial risk models available in the market (Aon Benfield, 2012d
Aon Benfield. 2012d.,Insurance-Linked Securities. Evolving Strength 2012., Aon Benfield Securities Report., Chicago,USA: Aon Benfield Securities.. . The development of capital markets for insurancelinked securities is desirable considering that increased competition within and between the market and reinsurance companies would bring better product quality and affordability for insurance coverage. However, to increase investors and expand market size in a way that does not increase disaster risk, asymmetric information problems must be overcome by collecting and disseminating risk and loss information. Institutional infrastructure, such as accounting or solvency rules, also needs to be developed.
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