Author Archives: Emily Holbrook

About Emily Holbrook

Emily Holbrook is a former editor of the Risk Management Monitor and Risk Management magazine. You can read more of her writing at EmilyHolbrook.com.
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Betting on Catastrophes

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Investors are looking to recoup money lost in the recession by betting on the likelihood that a catastrophe will soon strike.

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They are investing in catastrophe bonds at an unprecedented level in expectation that a massive hurricane, large earthquake or torrential floods will take place at some point, somewhere. It is a hedging technique used to bet against the movements of the traditional equities and fixed income markets.

2010 marked the third strongest year in the cat bond market’s 20-year history with $5 billion invested, according to Swiss Re.

“Last year marked a strong rebound after the financial crisis – we have seen healthy year-on-year growth since then, mainly due to the conservative collateral structures that came to market after Lehman Brothers collapsed as well as further price convergence with the reinsurance market,” Martin Bisping, Swiss Re’s Head of Non-Life Risk Transformation, said in a telephone interview.

Considering that the cost of natural disasters to insurers increased by more than two-thirds to $37 billion last year from 2009, investing in cat bonds may be the safest, and probably most depressing, bet around.

Australian Insurers Brace for Worst

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Close to 348,000 square miles across 20 towns are flooded and 200,000 residents affected after heavy rains drenched Queensland and neighboring states from December 25 to January 3.

The effects of the flooding are far-reaching. Reports indicate Queensland-based insurer SunCorp has told the Australian Stock Exchange it has received 1,800 claims so far. A JP Morgan analyst has said that losses to the insurance industry due to the flooding are estimated at $1 billion. The Insurance Council of Australia (ICA), however, has said that it is too early to provide a loss estimate.

The worst flooding in decades has affected an area the size of Germany and France, leaving towns virtual islands in a muddy inland sea, devastated crops, cut major rail and road links to coal ports, slashed exports and forced up world coal prices.

Coal production in Queensland has been severely disrupted. “The Queensland Resources Council said lost coal and gas production would run to hundreds of million of dollars.” Economists have projected a $6 billion loss from reduced export volumes.

Key crops such as cotton, sunflower, sugar and wheat have been gravely affected by the floods and, according to the Queensland Farmers Federation, few farmers have flood insurance. Crop losses alone could exceed $1 billion.

Below is a video of the “biblical” Australian floods that have claimed the lives of 10.

Needless to say, the property damage in Queensland and neighboring states will be a hard hit to the country’s insurers.

Ringing in the New Year With Natural Disaster Cleanup

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It’s safe to say it wasn’t the best start to a new year for some parts of the United States.

The Northeast continues to dig out with trucks still hauling away snow that fell more than eight days ago. Though many businesses were affected by the storm, it was recently reported that the post-Christmas blizzard cost retailers a whopping $1 billion. That’s according to shopper traffic analysis company, ShopperTrak. The following are their findings:

  • On Dec. 26 total U.S. foot traffic was 11.2% below what it would have been expected if the blizzard had not hit the Northeast.
  • Northeast region foot traffic fell 6.1% on Dec. 26 while the other three regions (Midwest, South, West) had an average gain of 38.6% versus last year.
  • On Dec. 27 total U.S. foot traffic was 13.9% below expectations had the blizzard not hit the Northeast.
  • Northeast region foot traffic fell 42.9% on Dec. 27 compared to 2009, while the other regions averaged a 13.0% gain.
  • Preliminary GAFO retail sales estimates for Dec. 26 and 27 combined are roughly $10 billion. Assuming a conservative 10% sales impact nationally for the blizzard, roughly $1 billion of retail spending was postponed during the two day period.

It’s not only retailers that were financially impacted by the monstrous storm; some estimates say the airline industry could see blizzard-related costs upwards of $150 million.

At least 6,000 flights, mostly in and out of New York City-area airports, were canceled because of the storm, according to the Federal Aviation Administration. Those disruptions, along with the need to bring back planes that had been moved in anticipation of the blizzard and other factors, could cost airlines between $100 million and $150 million, estimates Helane Becker, an airline analyst at Dahlman Rose.

In the West, Californians were hit with heavy rains and winds that caused flooding through the Los Angeles area, the power of which can be seen in this video of Loma Linda, California on December 22.

It was reported that rains dumped more than half the year’s normal rainfall in many California regions, and areas of Los Angeles recorded almost 22 inches of rain. The area continues to assess damage and clean up costs.

And lastly, on New Year’s Eve, a deadly tornado outbreak swept across Arkansas, Mississippi, Missouri and Illinois. The Weather Channel says there were 30 reported tornadoes, with five of the twisters earning an EF3 rating. Seven people were killed during the storms, making it the second deadliest New Year’s Eve for tornadoes.

Is this a sign for what’s to come in 2011 or merely a dramatic end to a year filled with unprecedented natural disasters?

Corporate Malfeasance From Enron to Lehman

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The world has seen its share of bad business ethics ever since citizens began offering goods or services for a stipend. The effects of such wrongdoings have been magnified, however, as businesses have prospered and the greed of some has grown. Greed which can sometimes drive people to forget their morals. Some may think of Lehman Brothers as the the worst case of corporate malfeasance to ever rock the business world, while others may claim it was Enron.

One website has published what it claims are the “10 Great Moments in Corporate Malfeasance.” I’m not so sure the word “great” aptly describes these 10 moments. I would guess “worst” or “reputation-ruining” would be more appropriate. Nevertheless, after introducing the piece with the Enron scandal, the site says “what follows are 10 more examples of what a person might do if given the chance to make more money.”

It lists pharmaceutical maker Roche (#10) as refusing to sell its HIV drug Fuzeon at $18,000 (what it was valued at by South Korean health officials) as opposed to $25,000. Even though the drug maker would still make a hefty profit, it refused to sell at the discounted price with the head of Roche’s Korean division claiming, “We are not in the business to save lives, but to make money. Saving lives is not our business.” That’s one people won’t soon forget.

WellPoint (#7) didn’t fair so well in the spotlight after the U.S. health care debate raged this year. It was found that the insurance company was severely abusing recission (the policy of finding ways to cancel insurance contracts). Whose contracts were they canceling?

Women who were diagnosed with breast cancer.

WellPoint was using a computer algorithm that automatically targeted them and every other policyholder recently diagnosed with breast cancer. The software triggered an immediate fraud investigation, as the company searched for some pretext to drop their policies, according to government regulators and investigators. Once the women were singled out, they say, the insurer then canceled their policies based on either erroneous or flimsy information. WellPoint declined to comment on the women’s specific cases without a signed waiver from them, citing privacy laws.

Getting to what most people think of when they think “corporate malfeasance,” the list mentions Goldman Sachs (#5) and its “doomed-to-fail” fund.

Investment banking house Goldman Sachs created Abacus 2007-ACI, a fund of mortgages it sold to investors. What Goldman didn’t tell Abacus fund investors was that the mortgages they were betting would succeed had been handpicked by a favorite Goldman investor to actually lose.

That investor was John Paulson, who eventually made $1 billion from the fund.

IBM (#1) and its tech support garnered the unattractive top spot on the list. The tech giant sold some of its earliest model computers to Nazi Germany, with its founder, Thomas Watson, receiving the highest honor the country could bestow upon non-Germans, the Grand Cross of the German Eagle.

IBM admits that the company’s computers were used to carry out the logistics of the Holocaust, but denies awareness of this use at the time.

Thankfully, there are organizations in place that act as watchdogs for major corporations. CorpWatch is a nonprofit that works to expose corporate malfeasance and “advocate for multinational corporate accountability and transparency.” And probably more well-known is Corporate Accountability International, an organization that has fought against abusive corporations for more than 30 years. They have an impressive track record; from the infant formula campaign of the late 70s and early 80s to the nuclear weaponmaker’s campaign that spanned a decade, they work to bring to light wrongdoings of big businesses. Something Lehman and Enron could have used.

We are a capitalist society, which is only wrong when greed comes before humanity.