8.3.3.3.Vulnerability of Reinsurers
Reinsurance provides a significant and essential form of risk-spreading capacity
for primary insurers. For natural catastrophes, this risk-spreading normally
takes the form of an "excess" contract; primary insurers retain the
first tier of losses up to a "trigger point" above which they purchase
reinsurance, which operates up to a specified "exit point" or upper
limit. After the catastrophes of the past 2 decades, reinsurers are leaving
more of the risks with primary insurers, by increasing trigger points and lowering
exit points (Stipp, 1997).
Many of the vulnerabilities experienced by primary insurers also apply to reinsurers.
Several reinsurers became insolvent or were absorbed by larger firms during
the crisis period of 1989-1993 (ISO, 1999; Mooney, 2000). The unexpectedly
costly European windstorms of 1999 caused further problems (Andrews, 2000).
For example, an already weakened Australian reinsurer covering these storms
became insolvent despite total assets of US$2.3 billion (Howard, 2000a). According
to the Insurance Information Institute (III, 2000a), the world's catastrophe
reinsurance industry "…lacks the capacity to insure mega-losses in
excess of US$50 billion." Government reinsurance systems also have shown
signs of stress—as evidenced in France, where reserves fell by 50% during
the 1990s and reinsurance rates rose sharply (CCR, 1999).
8.3.3.4. Regulatory Uncertainties
An additional source of vulnerability arises from regulatory uncertainties,
such as the degree of flexibility afforded in withdrawing from markets and risks
and in raising insurance prices (Davidson, 1996; Insurance Regulator, 1998;
III, 2000a; Ryland, 2000). In some jurisdictions, regulators have restricted
policy cancellations and nonrenewals following natural disaster losses such
as Hurricane Andrew (ISO, 1994a,b; Lecomte and Gahagan, 1998). Recent requests
from Florida insurers to double rates to protect insurers from hurricane risks
also have been resisted by regulators (III, 2000b). On the other hand, under
some conditions regulators can force insurers to withdraw from markets or otherwise
change their business practices so they maintain minimum solvency requirements
(GAO, 2000a). Pre-event accumulation and taxation of reserves also is an important
issue, and policies vary by country (Eley, 1996; Davidson, 1997).
8.3.3.5.Vulnerability of Local, State, and Federal Governments
as Providers of Insurance and Relief Assistance
Under climate change, sustained increases in the frequency and/or intensity
of extreme weather events could stress the government sector itself as a provider
of insurance, a provider of domestic and international disaster preparedness/recovery
services, and an entity that itself manages property and undertakes weather-sensitive
activities (e.g., ranging from mail delivery to operation of military facilities
near coastlines or waterways). Increasingly, governments seek to cap or reduce
existing exposures (ISO 1994b, 1999; Gastel, 1999; Pullen 1999b; FEMA, 2000;
III, 2000b). Governments in developing countries participate especially deeply
in weather-related risks, given the low level of private insurance availability
and often a higher level of government-owned infrastructure.
Disaster relief provided by the U.S. government has totaled $30 billion since
1953 (Changnon and Easterling 2000). Nearly half of these losses have occurred
since 1990, and inflation-corrected payments rose six-fold between the late
1960s and the early 1990s (Easterling et al., 2000a). These costs do
not include temporary housing, unemployment insurance, and small business loans
also provided by government.
Governments are particularly sensitive to changes in flood- and crop-related
losses because they often are the primary or sole providers of such insurance,
and climate changes are expected to exacerbate these losses (see Chapters 4
and 5; Rosenzweig et al., 2000). U.S. government-insured crop/hail losses
grew 11-fold between the 1950s and the 1990s (Easterling et al., 2000a).
In Japan, the majority of international relief—7-8 billion yen in
1990—is related to floods (Sudo et al., 2000). Solvency is a material
issue for government programs, as exemplified by the $810 million deficit in
the U.S. flood insurance program in the mid-1990s (Anderson, 2000). U.S. crop
and flood insurance programs have never been profitable (GAO, 2000a; Heinz Center,
2000). The French catastrophe reinsurance fund (Caisse Centrale de Réassurance)
had become depleted as of the late 1990s and could no longer deal with a major
catastrophe from accumulated surplus (CCR, 1999).
|