Catastrophe risk

Abstract
Thispaperexaminestherecentemergenceofinitiativesinvolvingthereinsuranceindustryandthecapitalmarketstodevelopmechanismstofinancethelossesarisingfromcatastrophicevents.seinitiativesarediscussedfromtwoperspectives.Oneperspectiveexploresthesefinancingmechanismsfromthecontentionthatcatastrophiceventsarebecomingincreasinglynon-insurablewithincontemporaryrisksociety.Inthisregardthepaperaddressesissuesrelatingtothecoherenceandsustainabilityoftherisknetworksunderpinningeffortstomaintaintheinsurabilityofcatastrophicevents.Thesecatastrophe-financinginitiativesarealsodiscussedfromasecond,althoughrelatedperspective.Thisreferstotheveryemergenceofthesedifferentfinancingmechanisms.Inthisregardthemovingpotentialofliberalgovernmentortheinventivemechanicsdrivingthedevelopmentofdifferentwaystomanagecatastrophicriskbecomesignificant.Thepaperarguesthattheemergenceofthesedifferentcatastrophe-financingmechanismsisoccurringattheintersectionofconcernsoverthenon-insurabilityofthecatastrophicandtheextremesofcapitalistingenuity,suggestingbothperspectivesmightofferinsightsintosomeofthepossiblefuturetrajectoriesofrisksociety

Thispaperisconcernedwithcatastrophicrisk(bothfromnaturalcatastrophicevents,suchasearthquakes,hurricanesandfloods,andfrom‘man-made’ones,suchasenvironmentaldisasters,satellitecrashesandterroristattacks).Morespecifically,thepaperaddressesissuesrelatingtomechanismsavailabletofinancethecostsassociatedwithsuchcatastrophicevents.Thefocusofthepaperisontherecentemergenceofinnovativefinancialinstrumentsdevelopedbyreinsurersinconjunctionwiththecapitalmarketsdesignedtospreadthecostsofcatastrophesacrossawiderfinancingbase.Thisprocess,termedthesecuritizationofcatastrophicrisk,involvespackagingtherisksassociatedwithaparticularcatastrophiceventandtransferringthemtothecapitalmarkets,assumestheobligationforfinancingthecostsofcatastrophesinreturnforsomeformofpaymentfromthereinsurer.Securitizedcatastrophicriskfirstappearedinthecapitalmarketsin1995and1996andremainsasyetverymuchinitsinfancy.Whileinitialattemptstoraiseaninterestintheseproductswereconsideredsomewhatdisappointing,theannualUSAmarketsizeisnowestimatedtobegreaterthanUS$1billion,withaprojectedannualmarketofperhapsUS$60billion(McDonald1999:75).