A reader notes that in Tsunami Insurance I wrote that “…it appears that insurers usually exclude tsunamis from flood coverage, considering them more like earthquakes.” (Note the words “it appears that”.)

He says he has researched this issue and has found that:

In the US, the National Flood Insurance Plan (NFIP), the Insurance Services Office (ISO) and the Factory Mutual Insurance Company (FMO) consider all forms of wave damage including tsunamis and tidal waves as flood losses. These groups are not concerned with what caused the flood.

That paragraph is from a report Perspectives — Tsunami by the insurance broker Willis; look under January 28, 2005. The report has much further context, including a discussion of how nonetheless many insurers may write policies that make an excluded peril take precedence over an insured peril.

He also notes some insurers that do class tsunamis as earthquakes, as I mentioned.

Among the many possible causes of tsunamis, ranging from mudslides to meteors, it seems that people living in places that might have tsunamis (which includes the North American east coast) might do well to check their insurance policies, especially for flood insurance, to see what sort of concurrent contingent perils may be included in them.

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My, I’m behind on responding to comments.

A reader says:

Phenomenon of Tsunami is going to be universal and may hit any country without any geographical /distance limitation. When the risk of Natural calamity is accepted in one country ,loss due to tsunami is to be paid, since application of premium rate is limited to that country.

That may be true for an insurance policy, but it doesn’t have to be true for a catastrophe bond, which can be bought by anyone anywhere.

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Speaking of natural disasters, this one wasn’t a disaster, but it was unusual: snow in the United Arab Emirates.

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The American Bar Association is concerned about insurance being out of date in a networked world:

Most businesses have insurance designed to cover them if a building burns down or someone trips and falls in the parking lot – yesterday’s risks. Today’s businesses may suffer intangible losses resulting from computer viruses, hacker attacks, and theft of confidential information. Current commercial general liability policies do not cover damage to intangible property. They exclude nearly all intellectual property exposures, and personal and advertising injury coverage for website designers. Internet search, access, content and service providers and companies that host bulletin boards are also excluded. Crime policies require identification of the perpetrator and cover only money, securities, and other tangible property. As a result, insurers are rejecting policyholders’ claims under traditional insurance.

This program examines the 21st century risk environment and the heightened legislative and regulatory focus of network security and privacy. It shows how traditional insurance policies fall short in protecting against 21st century risks, and identifies a new generation of specialty insurance coverage that can protect your clients against those risks.

That’s the course description for a teleconference and webcast the ABA is going to hold on 11 January, called 21st Century Risks Are Your Clients Covered?

Thanks to Phil for the pointer.

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In Tsunami Insurance I mentioned that there was some worry that 2004 being a record year for natural disasters might be a trend, and whether insurers handle it.  Here’s more.

Canadian TV is presenting a three part series called The Great Warming, which compares Global Warming, especially the coming period as it increases, as a challenge comparable to the Great Depression or a Great Plague.

Worldchanging points out in The Great Warming and The Greening of the Reinsurance Industry that the TV series is sponsored by Swiss Re, and that that reinsurer (one of the largest in the world) is sufficiently interested in this issue that it is reducing its own emissions by 15% and investing the rest in green investment instruments according to the Kyoto protocol.

It seems to me that one of the biggest problems with the recent tsunamis has been assessing the damage. Hundreds of islands hadn’t even reported in days later. Investing in improved communications and monitoring might also be a good idea.  More on that later.

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Regarding Economy and Environment, commenter John Griffin wants to know: “What about Earthquake-Tsunami coverage?”

Catastrophe bonds were originally incented by the Northridge Earthquake in California and Hurricane Andrew in Florida, and cat bonds are commonly applied to earthquakes, hurricanes, floods, and wildfires. See also What’s a Cat Bond?

Regarding the particular tsunami of last week, it appears that insurers usually exclude tsunamis from flood coverage, considering them more like earthquakes. Insurers don’t seem very worried about excess claims, possibly because of exclusions like the above, and also because the insurers are often covered by catastrophe reinsurance.

Of course, this also means that many of the people affected by the tsunami probably weren’t insured.

2004 was the most expensive in modern history for natural disasters, with $105 billion in property damage and $42 billion in insurance claims. This leads to some worry as to whether this is a trend, and will insurers be able to deal with it. More on that later.

Meanwhile, a single worst-case Internet worm could cause $50 billion in economic damages in the U.S. alone, and $100 billion worldwide.

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The Economist reports on a scheme being worked out by Richard Wilcox at the World Food Fund to float famine insurance on behalf of inhabitants of famine-prone  regions.  Basically, it’s probably cheaper to pay for insurance that will pay off to the inhabitants when rains fail, so that they won’t sell their tools and burn all the vegetation for firewood.

Cheaper than dealing with refugees, wars, broken economies, and failed states. Instead of having a Band-Aid to rush in aid after people start dying, insure them before the problem starts and keep them alive and the environment and the economy intact.

The Economist article notes that bad government may in many senses be responsible for famine, “But bad government is hard to measure, and therefore hard to insure against. Rainfall, by contrast, is easy to measure.”

WFP seems serious about this scheme, and says it could be up and running by 2007. No invasions or nationbuilding required. Famines prevented at less international expense than cleaning them up later, and without destroying the indigenous cultures.

Now wouldn’t that be a Merry Christmas 2007?

See “Famine insurance, Hedging against the horsemen,” Dec 9th 2004, From The Economist print edition.

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I’m heading down to the Internet2 conference which is in Austin this week. They invited me to be on a panel tomorrow about Can we get ahead of the Crackers?

My answer is: yes, if we leverage technology with collective action. After all, force majeure events are aggregated; they affect multiple organizations. So strategies to pool risk across and beyond the pool of affected enterprises. This is what insurance does, and there are financial and other risk management strategies beyond that.

The panel will be webcast.

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Commenting on the previous post, Adam wants to know:

“But…but…what is a cat bond? How does it work? When does it pay? Does it have coupons? Who gets what risk with them?”

Fair enough.

Cat bond is short for catastrophe bond. A cat bond is somewhat like a municipal bond, except if the catastrophe occurs, the principal goes away to deal with the catastrophe.

Why would anyone buy a bond that could vanish? The principal of almost any investment could disappear, as many of us who invested in stocks in the late 1990s can attest. Even a municipal bond can be downgraded and thus lose value. And while the precise time of occurence of a catastrophe such as an earthquake, hurricane, flood, or wildfire may not be predictable, the probability of its occurence during, e.g., a ten year period is usually fairly well known, and not as susceptible to politics or market fads as some other investments. At the least, the risk of loss of principal of a catastrophe bond is not strongly correlated with risk of loss of principal of other investments.

And catastrophe bonds typically pay a higher percentage than other bonds.

Who buys them? Usually not individuals, rather lreinsurers, insurers, commercial banks, hedge funds, and investment advisors.

Who issues them? Financial houses, insurance companies, and hedge funds.

Why? To increase the pool of available capital to cover large risks.

For example? Packages of credit card debts, mortgages, or automobile loans. Force majeure events such as earthquakes, floods, and hurricanes.

The application of cat bonds to Internet force majeure events seems straightforward. Except, of course, that probability matrices are needed to write them.

Is that what you wanted to know, Adam?

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Hurricane Ivan has prompted the Wall Street Journal to publish an article about catastrophe bonds:

“Cat bonds first began to appear in the 1990s after insurers and reinsurers suffered financially from storms such as Hurricane Andrew that struck Florida in 1992 and the Northridge Earthquake that hit California in 1994. From 1989 to 1995, total insured property losses in the U.S. were $75 billion, 50% more than the property losses from the prior 40 years, according to Standard & Poor’s.”

They omit from the history lesson that cat bonds weren’t actually issued for earthquakes at that point because Warren Buffett had one of his companies issue insurance policies. Cat bonds did catch on, though:

“Reinsurance giant Swiss Re, for example, is a major issuer of catastrophe bonds. A year ago, under its Arbor program, Swiss Re issued six catastrophe bonds with four-year maturities and total protection for Swiss Re of $205 million.”
September 13, 2004
“Investors Who Bet On Storms, Disasters Gauge Trade Winds,”
By CARRICK MOLLENKAMP and CHRISTOPHER OSTER
Staff Reporters of THE WALL STREET JOURNAL

Still, nobody is as yet issuing cat bonds for Internet outages, even though a single Internet worm could cost more than all three of Hurricanes Charley, Frances, and Ivan combined.

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