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Extreme Events, Global Warming, and Insurance-Linked Securities: How to Trigger the “Tipping Point”

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  • Erwann Michel-Kerjan

    () ([1] aThe Wharton School, Risk Management and Decision Processes Center, University of Pennsylvania, 3730 Walnut Street, Huntsman Hall, Suite 500, Philadelphia, PA 19104, U.S.A. [2] bLaboratoire d'économétrie, Ecole Polytechnique, 1 rue Descartes, Paris 75005, France.)

  • Frederic Morlaye

    () (Capital Markets Group, Guy Carpenter, Tour Ariane, 5 place de la Pyramide, La Défense 9, Paris La Défense Cedex 92088, France.)

Abstract

Large-scale disasters have occurred at an accelerated rhythm in the past 5 years. Further, the continuous increase of exposed values in high-risk areas and the potential impact of global warming on the intensity of weather-related events shall accelerate the number and increase the scale of mega-catastrophes in the near future. That is a new era for catastrophe risk management that calls for the development of new solutions, in complement to the traditional insurance and reinsurance. The authors discuss some of the main drivers of the radical shift that happened in the insurance-linked securities (ILS) market after the 2005 hurricane season in the Atlantic basin, which has rapidly become one of the world peak zones in terms of exposure. They explain why, despite this very encouraging evolution, the market has not expanded more (contrary to credit derivatives for instance). They propose three complementary ways to increase interest in these instruments that could effectively trigger the tipping point toward a much more significant volume of capital entering the ILS market: (1) increasing investors' interest through tranching, (2) addressing the basis risk challenge through index-based derivatives, and (3) innovating through the development of new products; the authors introduce the concept of derivative solutions based on equity volatility dispersion. The Geneva Papers (2008) 33, 153–176. doi:10.1057/palgrave.gpp.2510159

Suggested Citation

  • Erwann Michel-Kerjan & Frederic Morlaye, 2008. "Extreme Events, Global Warming, and Insurance-Linked Securities: How to Trigger the “Tipping Point”," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(1), pages 153-176, January.
  • Handle: RePEc:pal:gpprii:v:33:y:2008:i:1:p:153-176
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    Citations

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    Cited by:

    1. W. Botzen & J. Bergh & L. Bouwer, 2010. "Climate change and increased risk for the insurance sector: a global perspective and an assessment for the Netherlands," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 52(3), pages 577-598, March.
    2. Kousky, Carolyn, 2010. "Managing the Risk of Natural Catastrophes: The Role and Functioning of State Insurance Programs," Discussion Papers dp-10-30, Resources For the Future.
    3. J. David Cummins & Mary A. Weiss, 2009. "Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk-Transfer Solutions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 493-545.
    4. Wenzel, Lars & Wolf, André, 2013. "Protection against major catastrophes: An economic perspective," HWWI Research Papers 137, Hamburg Institute of International Economics (HWWI).
    5. Kunreuther, Howard & Michel-Kerjan, Erwann, 2012. "Impact of behavioral issues on green growth policies and weather-related disaster reduction in developing countries," Policy Research Working Paper Series 6241, The World Bank.
    6. Howard Kunreuther & Geoffrey Heal, 2012. "Managing Catastrophic Risk," NBER Working Papers 18136, National Bureau of Economic Research, Inc.
    7. Kousky, Carolyn & Cooke, Roger M., 2009. "The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations," Discussion Papers dp-09-36-rev.pdf, Resources For the Future.
    8. Whalley, John & Yuan, Yufei, 2009. "Global financial structure and climate change," Journal of Financial Transformation, Capco Institute, vol. 25, pages 161-168.
    9. Dwight Jaffee & Howard Kunreuther & Erwann Michel-Kerjan, 2008. "Long Term Insurance (LTI) for Addressing Catastrophe Risk," NBER Working Papers 14210, National Bureau of Economic Research, Inc.
    10. Amanda Savitt, 2017. "Insurance as a tool for hazard risk management? An evaluation of the literature," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 86(2), pages 583-599, March.

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