By Sam Kerr
The devastating Atlantic hurricane season of 2017 has revealed a further injustice to compound the loss of life and destruction of property — the sheer cost of a disaster which is not covered by any type of insurance. According to risk modelling firm RMS, insured losses for Hurricane Maria alone were estimated at $15bn-$30bn although economic losses could be as high as $60bn.
Efforts are underway to right this imbalance. “Capital markets can transform society,” said Arunma Oteh, treasurer at the World Bank told GlobalMarkets.
“They offer powerful tools for eradicating poverty and building shared prosperity. At the World Bank we have been connecting capital markets to development since we issued our first bond 70 years ago.”
With investors hungry for yield, there are efforts underway to use insurance-linked securities (ILS) to bridge the gap between insured and economic loss putting more funds at the disposal of disaster stricken nations.
“There’s over $30tr in the capital markets, and investors are eager to put their balance sheets to work to generate income,” said Daniel Stander, global head of the public sector practice at RMS.
“So, when you have this profound protection gap on the one hand and then on the other this vast amount of capital looking for a home, it’s not inappropriate to ask whether we can bring the two together.”
The World Bank is also ready to meet this challenge. “One financial tool we have to help our member countries be more resilient in the wake of disasters is to leverage insurance-linked securities,” said Oteh. “Over the past 10 years, we have executed more than $2bn in transactions that have transferred risks from natural disasters to the capital markets.”
Oteh said use of capital markets had given the World Bank a broader set of tools to build countries’ resilience and was working with them put in place disaster risk management frameworks that included early warning systems and resilient infrastructure.
“Preparing for disasters saves lives and money, and is a key way to achieve our goals of eradicating extreme poverty and boosting shared prosperity,” she said.
She said ILS risk management tools were effective. For example the World Bank received confirmation this week that the devastating earthquake that hit Mexico on September 7 has triggered a payout from a catastrophe bond it issued in August, this year. As a result, Mexico’s natural disaster relief fund, FONDEN, will receive $150m for its relief efforts.
Similarly, she said the Caribbean Catastrophe Risk Insurance Facility, which was set up with the help of the World Bank, has made more $50m in payouts since the start of the 2017 Atlantic hurricane season.