Floods are the most common natural catastrophe worldwide according to a new paper from insurance and financial services group Allianz. During 2010 the International Disaster Database EM-DAT collected data on approximately 400 natural catastrophes with at least 100 people affected or 10 deaths, of these 182 cases were caused by flooding affecting 179m people worldwide.
Despite the high incidence of flooding disasters around the world in both developed and developing nations, to date only one catastrophe bond transaction that we are aware of has attempted to transfer the risk of flood to capital market investors. That transaction called Blue Wings Ltd., issued in 2007 by Allianz themselves, transferred the risks of severe river floods in the UK to investors using a parametric index based on actual measured river depths.
Measurement of river depths to allow warnings of impending flooding to be made is common in Europe and the U.S. and yet we haven’t seen a repeat of the innovative Blue Wings transaction since it was issued. Given the threat posed by flooding to the developed and developing world, the amount of damages both economic and insured that result from floods and the fact that it is the most common peril it’s surprising that flood is not regularly issued as part of cat bond transactions.
A well modelled and structured catastrophe bond which brought flood risk to the insurance-linked securities investment market would likely be well received as investors would enjoy a new risk to diversify their portfolios with. Is there a reason that flood has not been favoured as a cat bond risk? We’re interested to hear your thoughts so please comment below.
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