Catastrophe deals threaten reinsurance sector
Thursday, 04 30 2015, Category: Insurance and Reinsurance, Country: World
The $575bn industry that protects insurers from earthquakes, hurricanes and other disasters risks a banking-style meltdown if it continues making “dangerous” changes to how it is structured, new research has found. After a three-year study of the reinsurance sector, a team of business school academics has found that some companies are now packaging together catastrophe risks in a similar way to the carving up of subprime mortgages by big banks before the financial crisis. As a result, the victims of a costly catastrophe – such as an earthquake or storm that destroys large areas – could run into problems having their insurance claims paid. Professor Paula Jarzabkowski of Cass Business School, one of the researchers, said mainstream insurers were potentially spreading risks to parties that did not fully understand them. Many have been increasingly turning to pension funds and other capital markets investors – by issuing securities such as catastrophe bonds – as an alternative to traditional reinsurance.