Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors Affecting Their Use
Because of population growth, resulting real estate development, and rising real estate values in hazard-prone areas, our nation is increasingly exposed to much higher property-casualty losses—both insured and uninsured—from natural catastrophes than in the past. In the 1990s, a series of natural disasters, including Hurricane Andrew and the Northridge earthquake, (1)raised questions about the adequacy of the insurance industry’s financial capacity to cover large catastrophes without limiting coverage or substantially raising premiums and (2) called attention to ways of raising additional sources of capital to help cover catastrophic risk. The nation’s exposure to higher property-casualty losses increases pressure on federal, state, and local governments; businesses; and individuals to assume everlarger liabilities for losses associated with natural catastrophes. Recognizing this greater exposure and responding to concerns about insurance market capacity, participants in the insurance industry and capital markets have developed new capital market instruments (hereafter called risk-linked securities) as an alternative to traditional propertycasualty
reinsurance, or insurance for insurers.