Experts discuss cat bonds for developing nations

by Artemis on June 3, 2008

The Standard & Poor’s Insurance Conference 2008 was held in New York over the last two days. One of the issues that was covered was the topic of cat bonds and their potential application to catastrophe risks in developing nations.

Here are some highlights from this discussion (link to the full article at the bottom).

They discussed the potential to use catastrophe bonds to help these poorer nations rebuild after natural catastrophes and the fact that they can be hindered by red tape and lack of investor acceptance. Jay Green, VP of Swiss Re Capital Markets said “For China and Myanmar, we think there is a lot of potential” alluding to the recent disasters in these countries. He referenced the Formosa Re capital market transaction by Taiwan in 2003 to protect itself against earthquake risk and the Fonden transaction in Mexico in 2006 (details of both these deals in our directory). Green said he was “concerned about the gap between insured and economic loss”, I assume that meant that he felt the deals did not go far enough to protect the nations from the mega catastrophes that could happen.

Niraj Patel, MD for ILS at Genworth Investments said “They are looking for a quick response and the ability to distribute the money to the people who need it” about the governments who could benefit from tapping the capital markets for risk protection.

Gary Martucci of Standard & Poor’s hinted that the costs of bringing cat bonds to market may be putting off governments from becoming issuers but stated that the World Bank had approached him to discuss the possibility of rating such instruments.

It seems to me that we have to get to a point where developing nations are receiving some kind of risk protection via the capital markets. Weather derivatives are getting there, perhaps hurricane or storm linked futures could be the next step to giving more complete disaster protection? Working out the details may not be quite there yet but at least the subject is being discussed.

The full article is available on Yahoo.

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James Kane June 3, 2008 at 9:52 pm

Very interesting! Is it really in a governments interest to allow private corporations to fund disaster response in this way? Doesn’t a system like this mean that corporations and investors will stand to profit from others misery? Or is there a way for the governments to also profit when they issue such bonds and no disaster happens (and so feed the money back into the country). Please excuse me if I don’t understand this properly, it’s new to me and it sounds like a great idea but maybe with some moral hazard attached…

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