Wednesday, July 17, 2013

Natural Catastrophe Developments

There have been some interesting developments in the world of natural catastrophes and disasters worth discussing.  First, in Europe, a vehicle meant to address the reoccurring flooding risks has been created.  It is called Flood Re.  Flood Re is a scheme (currently based on a memorandum of understanding) devised between the Association of British Insurers and the government of the United Kingdom that allegedly will insure that flood insurance remain available and affordable.  Essentially, it is a not-for-profit flood fund run and financed by insurers, which will cap flood insurance prices. Premiums will be linked to tax bands ensuring support is targeted at those on lower incomes.

Flood Re will charge member firms a levy on homeowners' premiums.  It is designed to deal with at least 99.5% of flood years. Even in the worst half per cent of years, Flood Re will cover losses up to those expected in a 1 in 200 year-a year that would be six times worse than the flooding that occurred in 2007.  It is expected to launch mid-2015.  Apparently, there are many details yet to be worked out and there has been some criticism of the scheme.

On concern expressed is the interesting caveat added by the government that if Flood Re fails to work, especially if through insurance industry hesitation, every homeowners' insurer will be mandated to offer flood cover on terms set by the government.  Flood Re is different than the US Federal Flood Insurance Program, but only time will tell whether its results will be better.  The good news is that governments are thinking proactively on how to address natural disasters caused by flooding.
 
The second development is the announcement by the Metropolitan Transit Authority (New York, New Jersey, Connecticut) of the preparation of a catastrophe bond triggered by only storm surge.  This the first of its kind and the first Cat Bond issued by the MTA.  What makes it unique, as the linked article above indicates, is that it is insuring a new peril -- storm surge -- which has not been done before.  There have been many Cat Bonds for windstorm, hurricanes, tornadoes, even thunderstorms, but not a bond that triggers solely on the height of a storm surge from a named storm.  Many see this as an innovative and welcomed development. 
 
We would be interested in hearing comments from you about these new government efforts to address natural disasters and others you might be aware of.