Global warming fear boosts catastrophe bond popularity

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A new report predicts insurers will increasingly look to alternative ways to protect their balance s...

A new report predicts insurers will increasingly look to alternative ways to protect their balance sheets or free up risk-based capital to address the climate change issue.

The Business of Climate Change: Challenges and Opportunities by John Llewellyn, a senior economic policy adviser at Lehman Brothers, claims that insurance-linked securities, which include catastrophe bonds, are the most popular option to do this.

These are high-yielding bonds held in trust that default when a predetermined event takes place.

They are often designed around event parameters such as a hurricane reading by an independent monitoring body to create comfort for the buyer, as the event and its trigger are clearly defined.

Mr Llewellyn commented: "This is attractive to the insurers because currently the marginal cost is less than standard reinsurance, and the credit risk of the capital markets is generally lower than that of the reinsurers.

"It is also attractive to the capital markets, because they are able to acquire exposure to a risk that is relatively uncorrelated with the financial markets - except at the extreme tail of the risk - and which therefore diversifies the investor's risk."

However, Mr Llewellyn noted that for the bond to be attractive to all parties, the underlying risk and trigger event must be sufficiently well-understood by non-specialist capital market investors; and the covered risk must be sufficiently close to the insurer's underlying exposure.

THE ATLANTIS PROJECT GOES ONLINE

A group of companies that specialise in geographic, hydrology, ecology and geology information have teamed up to launch an online tool aimed at helping insurers better address the impact of climate change and flood risks.

The British Geological Survey, the Centre for Ecology and Hydrology, Environment Agency, Met Office, Ordnance Survey and the United Kingdom Hydrographic Office have collaborated on the initiative, the latest for the Atlantis project, which was launched in 2004.

Available online at www.dnf.org/applications/atlantis, it aims to provide third parties with information on rivers and the terrain, together with many related datasets for assessing the impacts of changes in flood frequencies, flood magnitudes and sea levels.

James Brayshaw, director responsible for market development at Ordnance Survey, said: "The web pages are a step in the evolution of this leading initiative that provides the community with the chance to see the progress we have made collaboratively and obtain a better understanding of what Atlantis will offer.

"I believe that the Atlantis initiative will really make a difference to data sharing and the adoption of a consistent information framework to meet the needs of climate change, flooding and water-related environmental impacts."

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