1. Catastrophes Insurable vs. Non-Insurable Catastrophes
History of Insured Losses from Catastrophes
Reasons for Growth in Catastrophe Exposure
How Insurers Deal with Catastrophe Exposure
What Is Being Done to Help Industry Cope with Catastrophes
New Developments

2. Insurable vs. Non-Insurable Catastrophes
Ideal Criteria for an Insurable Exposure
1 Large Number of Similar Exposure Units
2 Fortuitous Losses
3 Catastrophe Unlikely
4 Definite Losses
5 Determinable Probability Distribution
6 Economic Feasibility

3. What Makes a Loss Uninsurable?
1 Large Number of Similar Exposure Units
If losses are concentrated in a particular area
Earthquakes, Floods
2 Fortuitous Losses
If location and timing of losses can be predicted
Flooding downstream after upstream area affected
Catastrophe Unlikely
If potential loss could hurt financial condition of industry
Tornadoes, riots can be covered
War, nuclear disaster cannot be covered

4. History of Insured Losses from Catastrophes - 1

5. History of Insured Losses from Catastrophes - 2

6. History of Insured Losses from Catastrophes - 3
Significant change in size of catastrophes occurred starting in 1989
The ten largest insured losses have all occurred since 1989
Taking inflation into account, eight of the ten largest losses have occurred since 1989
Current estimates of possible losses
New Madrid Fault Earthquake $116 billion
California Earthquake $77 billion
Florida Hurricane $76 billion
Northeast Hurricane $21 billion

7. Reasons for Growth in Catastrophe Exposure
Weather Pattern Change
Period of Unusually Good Weather (?)
Recent Return to the Long Term Norm
Population Growth in At Risk Areas for Hurricanes
Southeastern seacoast
Lowered Building Standards
Lulled by Reduced Storm Activity
Overwhelmed by Population Growth
Mandates to Cover Earthquakes
Impact of Catastrophe on Repair/Rebuilding Costs

8. How Insurers Deal with Catastrophe Exposure
Reinsurance
Managing Exposures
Sophisticated catastrophe modeling
Limiting concentration of exposures
Monitoring by zip code
Higher deductibles
Premium Increases
Withdrawals from Some Markets

9. What Is Being Done to Help Industry Cope with Catastrophes
California Earthquake Authority
Florida Hurricane Catastrophe Fund
Hazard Mitigation Grant Program (Floods)
Homeowners Insurance Availability Act (1999)
Not enacted yet
Would provide catastrophe reinsurance
Tax Deferred Catastrophe Reserves
Proposals under consideration in Congress

10. New Developments Securitization of Catastrophe Risk Catastrophe bonds
Contingent surplus notes
Exchange-traded catastrophe options
Catastrophe equity puts