Imagine you are a government minister responsible for disaster response. Five days have passed since the hurricane hit your country, and the floods have still not receded. Tens of thousands of your citizens have been made homeless. In the eyes of the people, the government is simply moving too slowly, and the press is baying for action. There is some reassurance though, as you know that over many years your country has paid premium into an international pooling scheme designed to provide substantial funds quickly when such a disaster strikes, to help pay some of the costs of recovery.
But then you hear from the regional multi-state insurance pool to which your finance minister has been contributing hard-fought annual premiums for the past decade. Your country is not going to receive a pay-out. In the scheme’s parametric formula, the value is below the threshold. You have discovered the toxic politics of basis risk.
We all know that prevention is better than cure. Trouble is, sometimes you catch a cold. And if you’re already vulnerable, a relatively small infection presents a big risk – especially if you don’t have timely access to sufficient amounts of the necessary medicines.
Despite the best will in the world, nobody can stop the ground from shaking or the wind from blowing. Nobody can say that the worst-case scenario will never happen.
So, when Mother Nature strikes a vulnerable, low-income country, how bad will the ensuing humanitarian crisis likely be? What will it take financially to recover and rebuild? And is there a role for insurance along with donor aid?
Breezy Point, N.Y., Oct. 31, 2012 – Street scene after Hurricane Sandy. Source: FEMA
Katrina. Sandy. Matthew. We tend to remember the big-name storms that take over the news cycle for weeks, offering up poignant images of rescued families.
Yet many of us barely notice losses racked up annually from flooding events all over the U.S.: flash floods in the Midwest and Northeast, torrential rains in bone-dry Houston, dam spillways exploding in formerly drought-stricken California.
After a blistering start to the 2017 U.S. severe weather season in which tornado, hail, and wind reports were at near or record levels of activity through to March, recent months have been closer to normal. As of early July, overall observations are still above the 10-year running average (2005-2015), but they’re slowly falling back into the expected bounds.
In terms of news events, October 28, 2005 maybe wasn’t that eventful. It was National Chocolate Day in the U.S. – an obvious cause for celebration. But for 32 RMS clients sitting in conference rooms in RMS offices as far apart as Hackensack, NJ, through to Tokyo, history was about to be made. After extensive road testing using RMS employees, these 32 brave individuals were the first clients to take the RMS Certified Catastrophe Risk Analyst (CCRA®) exam. Nineteen passed the exam and became our first client CCRA designees.
Fast forward 13 years and 59 training program sessions later, to April 27, 2017 when the most recent CCRA exam was held at five global RMS offices. This exam sitting became a milestone in itself. As of the April 27 exam, we can celebrate passing the 500-designee mark and now have an alumnus of 505 CCRA designees.
What is the El Niño Southern Oscillation? More conveniently known as ENSO, it is the planet’s largest source of natural climate variability on interannual time scales. ENSO describes the interaction between ocean and atmosphere in the equatorial Pacific, but the results of this interaction are global, and can last for many months. There is a good level of ENSO awareness in our industry, such as that warm phases of the oscillation (El Niño) tend to suppress Atlantic hurricane activity, and that cool phases (La Niña) tend to enhance it. But how was ENSO discovered? And how does it work?
The second Mexico multi-cat securitization was launched at the end of 2012 to provide reinsurance for the Fund for Natural Disasters (FONDEN) – established by the Mexican federal government as a disaster fund for the poor, which also finances disaster-damaged infrastructure. This three-year bond had a series of tranches covering earthquake or hurricane, each to be triggered by parametric “cat-in-a-box” structures. For one hurricane tranche, this was based on the central pressure of a storm passing into a large “box” drawn around the Pacific coasts of Mexico and Baja California, with the length of the box spanning well over a thousand miles. With a “U.S. National Hurricane Center (NHC) ratified” hurricane central pressure in the box of 920 millibars (mb) or lower there would be a 100 percent payout or $100 million; for a central pressure of 932 mb to 920 mb a 50 percent payout of $50 million.