Catastrophe risk

abstract
this paper examines the recent emergence of initiatives involving the reinsurance industry and the capital markets to develop mechanisms to finance the losses arising from catastrophic events. these initiatives are discussed from two perspectives. one perspective explores these financing mechanisms from the contention that catastrophic events are becoming increasingly non-insurable within contemporary risk society. in this regard the paper addresses issues relating to the coherence and sustainability of the risk networks underpinning efforts to maintain the insurability of catastrophic events. these catastrophe-financing initiatives are also discussed from a second, although related perspective. this refers to the very emergence of these different financing mechanisms. in this regard the moving potential of liberal government or the inventive mechanics driving the development of different ways to manage catastrophic risk become significant. the paper argues that the emergence of these different catastrophe-financing mechanisms is occurring at the intersection of concerns over the non-insurability of the catastrophic and the extremes of capitalist ingenuity, suggesting both perspectives might offer insights into some of the possible future trajectories of risk society

this paper is concerned with catastrophic risk (both from natural catastrophic events, such as earthquakes, hurricanes and floods, and from ‘man-made’ ones, such as environmental disasters, satellite crashes and terrorist attacks). more specifically, the paper addresses issues relating to mechanisms available to finance the costs associated with such catastrophic events. the focus of the paper is on the recent emergence of innovative financial instruments developed by reinsurers in conjunction with the capital markets designed to spread the costs of catastrophes across a wider financing base. this process, termed the securitization of catastrophic risk, involves packaging the risks associated with a particular catastrophic event and transferring them to the capital markets, which assumes the obligation for financing the costs of catastrophes in return for some form of payment from the reinsurer. securitized catastrophic risk first appeared in the capital markets in 1995 and 1996 and remains as yet very much in its infancy. while initial attempts to raise an interest in these products were considered somewhat disappointing, the annual usa market size is now estimated to be greater than us$1 billion, with a projected annual market of perhaps us$60 billion (mcdonald 1999: 75).

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