Atlas Magazine May 2013

Insurers facing extreme risks

The Boston bombing and the Waco (Texas) spectacular fire highlight once again the limits of the insurance and reinsurance sector upon the occurrence of extreme events.

Since the attacks of September 11, 2001 against the World Trade Center, the insurers have been aware of their fragility and of the intolerable level of their accumulations upon the occurrence of attacks, hurricanes, earthquakes and technological catastrophes. Accumulations generated not only by the superposition of life, non-life, business interruption guarantees but also by an unparalleled concentration of risks in highly populated areas such as Japan or in the great American cities. A cyclone worth over 100 billion USD of insured damages or a mega earthquake in Tokyo would pose considerable solvency issues with a cascade of bankruptcies at the end.

Faced with these growing threats, traditional solutions are no longer consistent enough to provide the insured with genuine coverage at a reasonable price. Neither a reduction in capacity, nor a sharp increase in premium rates, or an addi-tional list of exclusions would solve the problems that affect the very insurability of these risks.

It has become obvious that over the past twenty years, insurers can no longer provide sufficient capacity for risks that are ill-defined, difficult to identify and quantify.

With its series of natural catastrophes, the year 2011 perfectly confirms this finding

In fact, extreme risks require extreme solutions. Only a government-private insurers partnership is able to solve this problem. The establishment or consolidation of the existing pools is likely to address these evils whose costs would be borne by the whole community and not only by the insured alone.

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