By Hal M. Bundrick
NEW YORK (MainStreet) The frequency and cost of natural catastrophes have increased over the last 30 years. In fact, 2011 was a record year for natural disasters with Asia Pacific accounting for two-thirds of total losses, including the Tohoku earthquake and tsunami, according to Munich Re. But recent flooding in Central Europe, Alberta and Colorado may surpass the flood losses of that catastrophic year.
The human toll of these horrific events is staggering and incalculable. But the financial impact, while insignificant in comparison, is measurable and mounting. Through the first half of this year alone, global economic losses have been estimated to top $45 billion. And financially, the gap between the expenses incurred and those insured is widening. The insurance industry covered $13 billion of the worldwide losses -- less than one third -- leaving a global disaster gap of $32 billion. Historic typhoon Haiyan will add to the massive insurance shortfall for 2013.
Insurance companies are seeking additional financial instruments to hedge the risk and are increasingly seeking that relief from the capital markets.
Catastrophe bonds, or cat bonds, are one such device. Issued to cover a particular risk in a specific region, such as a hurricane or earthquake, cat bonds can pay a generous coupon to investors if the event doesn't occur or default and pay nothing if it does.
"Insurers and the capital markets can help reduce the disaster gap by working together with big data to deploy new capital to cover new perils in new regions," says BNY Mellon's international head of insurance Paul Traynor. "This will reduce the cost of rebuilding for governments and provide a positive contribution to society."