Catastrophe bonds, or “alternative capital” are commonly sold by insurers to share the risk they accept for natural disasters. With a boost from investors who are interested in higher returns while interest rates have been at record lows, the natural catastrophe bond market exploded in the second quarter, and strengthened the insurance industry to the extent it could cope with a $100 billion disaster.
According to Michael Kerner, Zurich Insurance Group Ltd.’s general insurance chief, “The insurance and the reinsurance industry are at very strong levels of solvency, there is lots of capital in the business. The industry can handle a $100 billion event, all the claims get paid, it’s not a big solvency issue.”
While the 2014 hurricane season has thus far been fairly calm, with natural disasters causing around $42 billion in damage worldwide, insurers always fear a big hit. Hurricane Katrina, in 2005, was one of the largest hurricanes ever recorded and the costliest natural disaster. Katrina cost the insurance industry $80 billion in damages. Zurich alone took a hit of around $600 million after tax and reinsurance from the hurricane in 2005.
With this recent increase in catastrophe bonds the insurance industry should be able to handle another large natural disaster. However, according to Kerner, there is still an element of risk. “The area of risk potentially is that some of this capital is not actually being asked to respond,” Mr. Kerner said. “This is capital dedicated to catastrophe losses, but we have not had a major catastrophe in a while, so this capital has not yet been tested.”