Tag Archives: Swiss Re

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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.

The “Unintended Consequences” of the Neal Bill

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In the video below, Swiss Re has done a marvelous job using new media to help advocate its position against “The Neal Bill” (HR 3424) that is aiming to impose a new tax on foreign reinsurers — something most of the stakeholders in the insurance industry are against.

The Risk and Insurance Management Society (RIMS), a nonprofit organization that represents risk managers (and publishes this blog … and pays my salary), is also firmly opposed due to the fact that any tax on the reinsurance industry will only be passed on first to the insurance industry and then to insurance buyers. Taxing reinsurers will also threaten capacity and make coverage harder to find at any price.

National Underwriter wrote a good, informative piece explaining such:

Speaking for RIMS, Scott Clark, risk and benefits officer for the Miami-Dade County School Board and a RIMS board liaison, said, “The group has always opposed proposals to restrict market access to insurance capacity.”

Mr. Scott called the legislation “a great threat to insurance capacity in the United States.”

“Over the past decade it has been proposed several times, not surprisingly, by a handful of U.S. insurers which seek to gain via a protected market that would allow them to charge higher prices,” Mr. Clark said.

Honestly, the changes proposed by this bill represent yet another example of how poorly Washington understands insurance. Advocates of the bill probably think they’re helping out insurance buyers by giving U.S. insurers an advantage. They’re not. No one — not reinsures, not insurers, not brokers, not commercial buyers, not personal line buyers — will benefit here.

And Swiss Re sums that all up perfectly in 140 seconds. (For more on the issue, you can check out www.KeepInsuranceCompetitive.com)

Insured Losses from Chilean Earthquake: Update

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Last Wednesday I blogged about the Chilean earthquake costing insurers up to $8 billion. That number has since been revised by Swiss Re — the world’s second largest reinsurer claims the impact on the sector would be between $4 and $7 billion.

Swiss Re says “it’s own losses from last month’s 8.8 magnitude earthquake would total about $500 million.” Germany’s Munich Re has said it expects to lose about $543 million from the Chilean disaster.

Analysts said that while the losses were large, they were probably not sufficient to reverse recent falls in the prices reinsurance companies charge insurance firms to cover natural disasters such as earthquakes or hurricanes. “Although it will almost certainly lead to a change in reinsurance prices for business in that region, it is not an industry-changing event on its own,” said Helvea analyst Tim Dawson.

Economic recovery from an earthquake is easier when the affected area’s economy is a strong one. Chile’s successful copper production industry was unaffected by the quake. And even though it’s wine, fish and paper pulp industry took a small hit, it’s overall economic outlook remains strong. That economy is now in the hands of incoming President Sebastian Pinera who takes office today. The billionaire conservative businessman and Harvard-trained economist has a tough job ahead of him but many feel he is well-equipped.

The earthquake that struck Chile on February 27 was not the biggest natural disaster the country has faced. Below is a video of the record-breaking 1960 earthquake that registered 9.5 on the Richter scale, the largest recorded earthquake in history — killing approximately 1,655 and causing $550 million in damage. The ravaging tsunamis that followed caused 61 deaths and $75 million worth of damage in Hawaii. Damage was reported in Japan and the U.S. as well. It is the only earthquake known as an “international disaster.”

Q&A on the “Global Risks 2010” Report

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Recently, the World Economic Forum released its “Global Risks 2010” report, in which partners, including Swiss Re and other corporate and academic entities, collaborated to analyze the most serious global risks for the current year. This was the one of several posts we have run recently about the biggest risks ahead for 2010, whether economic, political or otherwise. One thing that we see through all of them is the word “China.” It will be interesting to keep an eye on this prediction and whether the country will hinder or help the U.S. in 2010.

To discuss this and the rest of the year ahead, I was fortunate enough to touch base with Kurt Karl, chief U.S. economist at Swiss Re, to get his take on this year’s report.

In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?

Kurt Karl: The biggest global risk facing the U.S., as the “Global Risk 2010” report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.

How will underinvestment in infrastructure (especially agriculture) affect the U.S. economy in the long run?

Karl: Infrastructure is essential for long-term growth and there is some evidence that the U.S. has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.

What is the biggest, long-term international risk you see? And how will that affect the U.S.?

Karl: China, which is growing rapidly, is the biggest risk and the biggest opportunity for the U.S. economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries are competing on a level playing field.

What do you see as the biggest factor that could possibly prevent a complete economic recovery?

Karl: The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.

The biggest global risk facing the US, as the Global Risk 2010 report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.
2.  How will underinvestment in infrastructure (especially agriculture) affect the US economy in the long run?
Infrastructure is essential for long-term growth and there is some evidence that the US has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.
3.  What is the biggest, long-term international risk you see? And how will that affect the US?
China, which is growing rapidly, is the biggest risk and the biggest opportunity for the US economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries competing on a level playing field.
4.  What do you see as the biggest factor that could possibly prevent a complete economic recovery?
The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.1. In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?
The biggest global risk facing the US, as the Global Risk 2010 report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.
2.  How will underinvestment in infrastructure (especially agriculture) affect the US economy in the long run?
Infrastructure is essential for long-term growth and there is some evidence that the US has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.
3.  What is the biggest, long-term international risk you see? And how will that affect the US?
China, which is growing rapidly, is the biggest risk and the biggest opportunity for the US economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries competing on a level playing field.
4.  What do you see as the biggest factor that could possibly prevent a complete economic recovery?
The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.