Climate Change and Effective Catastophe Risk Management Mechanisms: A Law and Economics Analysis of Insurances and Alternative Approachesby Qihao He

GroupWork : Prof. Paolo Fabbri

Palma Emanuela Lombardi 253539

Jennifer Tierney 248831

Mirko Vasta 247948

Climate change risk and consequences

The mechanism of insurance to cover disasters

Catastrophe riskThe concept of riskFundamental and

particular risk

RISK MANAGEMENT

•DEFINITION •RISK AVERSION

ROAD MAP OF THE PAPER

MARKET FAILURE OF PRIVATE INSURANCE

INSURANCE-LINKED SECURITIES

JUSTIFICATION OF

GOVERNEMENT INTERVENTION

MARKET FAILURE OF PRIVATE INSURANCE FOR COVERING CATASTROPHE RISK

RESTRICTIONS ON THE SUPPLY OF CATASTROPHE INSURANCE

CAPACITY RESTRICTIONS

OF THE INSURANCE INDUSTRY

PROFITABILITY CONSTRAINTS ON INSURERS

INSURABILITY RESTRICTIONS

OF CATASTROPHE

RISK

• PREDICTABILITY

Market infancy of ILS in distributing catastrophe riskILS (Insurance-linked securities) ART

SECURITIZATION

Assets

Liability

Cash flow

Conveying financial interests

Main product of ILSWe have 3 types of ILS:

1. CATASTROPHE DERIVATIVES

EXCHANGE-TRADED DERIVATIVES

• FUTURES

• OPTIONS

• FUTURE OPTIONS

O.T.C. DERIVATIVES CONTRACTS

• SWAPS

• FORWARDS

• CREDIT DERIVATIVES

2. CONTINGENT CAPITALFINANCIER CAPITAL INSURER

CONTINGENT CAPITAL

CONTINGENT DEBIT

• CONTIGENT DEBIT FACILITIES

• CONTIGENT SURPLUS NOTES

CONTIGENT EQUITY

• CATASTROPHE EQUITY PUT OPTIONS

• PUT PROTECTED EQUITY

3. CATASTROPHE BONDS

Risked-linked securities that transfer catastrophe risks from INSURERS INVESTORS through

Fully-collateralized Special purpose vehicles (SPV)

SPV IS USUALLY CREATED BY AN INSURANCE COMPANY OR A REINSURANCE COMPANY

STRUCTURE AND TRIGGERS OF CATASTROPHE BONDSCATASTROPHE BONDS ARE ALSO CALLED :

• CAT BONDS • ACT OF GOD BONDS

ISSUANCES

• SPV •SPR THE INSURES PAYS A PREMIUM FOR THE CONVERAGE TO SPV

THE INVERSTORS WILL PURCHASE CATASTROPHE BONDS FROM SPV

TRIGGERS

INDEMNITY TRIGGER

INDEX TRIGGER

PARAMETRIC TRIGGER

JUSTIFICATIONS OF GOVERNMENT INTERVENTION IN MANAGING CATASTROPHE RISK

When private markets fail governments should:1. Assure that each individual maximizes expected utility2. Individuals are risk-averse3. Goverment provides coverage for losses and spread the

losses over taxpayers

Governments

Libertarian Paternalist

ic

Libertarian-paternalistic

Criticisms of government intervention

1. Premiums not reflect the risk being assured2. Lies in mandatory nature compared to private

insurance 3. Moral hazard induced by government criticism

Types of government intervention in covering catastrophe risk

Providing direct compensation to victims (Flood of the century)

Bundling compensation for catastrophes with other social insurance (Social security, Medicare)

Requiring a mandatory cover on voluntary insurance policies (Code des assurances)Supplying government-supported (re) Insurance (NFIP)

Which is the optimal mechanism for efficient Catastrophe Risk Management?

Comparing Private insurance, ILS and government intervention the best solution is :

Put on the baseline Private insurance with goverment intervention

Thank you for your attention….