Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Hail causes huge losses in Perth, Australia. Could cat bonds help?


A major hailstorm which struck the Perth area of Australia on the 22nd March this year has become one of the costliest disasters ever experienced in that country. The Insurance Council of Australia has released figures which show the storm was the third most costly event on record.

Losses from the storm have now reached AU$1.08b. Much of the losses (about 32%) have come from damage to cars caused by the large hail, damage to property and damage caused by flooding from the torrential rain which accompanied the storm make up most of the rest of the total.

Motor insurers will have been hit hard by an event of this size. Could we see a catastrophe bond issued specifically to cover hail damage for a major insurer with a large motor line?

In the late 1990’s Winterthur Insurance sold their WinCat Coupon product which was designed to provide cover for motor insurers in case of widespread hail damage. The coupon paid out to the insurers should over 6,000 cars be damaged by hail on a single day. Insurers in Perth will be wishing they had this kind of predictable pay-out insurance cover available to them now.

This particular storm saw more than 165,000 claims in total, with 32% of them being motor damage that would easily have triggered a WinCat Coupon many times over. Motor insurers need to be able to pay claims quickly so having their reinsurance triggered based on an index would make a lot of sense. Perhaps a cat bond could be issued which would pay out on a sliding scale based on how many car damage claims are received. Alternatively it might be possible to pay based on experienced weather conditions (size of hail, duration of storm, time of day etc) as is more traditional for the cat bond market.

The catastrophe bond market is now stabilizing and we hope that we will begin to see more innovative transactions emerging to address perils which aren’t usually covered in this manner. There have been cat bond deals which cover hail, but none which exclusively cover it for a motor insurer. Investors would welcome deals of this kind as a great chance to diversify their portfolios. Deal arrangers would love to be the first to structure a deal of this kind, particularly as it would be an easily repeatable deal for different locations. Can deals of this type be that far off?

Read more about this storm on the Perthnow website here.

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