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TODAY Wednesday 4 March 1998 Each weekday. Conn Nugent on what's new in the world, on the site.

 

TODAY IN THE WORLD: "An Earthquake in Insurance"

That's the title of an article in the 28 February issue of The Economist, and it was just melodramatic enough to stay the turn of the page. [You may recall the Monty Python bit where Eric Idle sat at a table in front of a banner reading "Why Chartered Accountants Are Not Boring" and then delivered an excruciating talk on the high excitements of bookkeeping.]

Three natural disasters of the 1990s have scared the insurance industry into distributing its risks much more broadly. Hurricane Andrew, the Northridge / Los Angeles earthquake, and the Kobe earthquake all drove a number of insurers to bankruptcy and disrupted the profitability of many more. Insurance companies are also keen students of climate change, which makes them fret considerably. Unlike their blowhard colleagues in the Chamber of Commerce, insurers know that chances are good that the world of the 21st Century will be a stormier, floodier place than today's. They also know that people have been building in vulnerable zones like seashores and floodplains at a rate much higher than the overall growth in development (Andrew was a nasty storm, but far short of the worst; it just happened to tear through a section of Florida hitherto unpopulated). Any year that combined a major earthquake (in San Francisco?) with a major hurricane (off New Jersey?) could rock the industry to its foundations.

Which is precisely why the insurers are pouring a wider foundation. They now offer "catastrophe bonds," aka Cats. A private investor buys a Cat and in return is assured a high rate of interest unless -- it's a big "unless" -- a big disaster occurs, in which case the investor loses all or part of the principal.

Here's how The Economist sums it up:

"Investors are in effect taking on the function of reinsurance...This is not an investment for everyone. Big earthquakes and hurricanes strike so rarely -- but with such severity -- that the usual risk-and-return formulae are less certain. Institutional investors, such as pension funds, have welcomed Cats because they offer a high return while diversifying a portfolio of other investments...The risk-return trade-off for the portfolio as a whole improves as long as the risk of the Cat is not correlated with that of the other investments."

Ecologically speaking, Cats are good development, I think. By making disasters a speculative commodity, we put a price on them, and prices arrived at by bidding assign values. We will begin to find out -- in crude terms, at least -- how much climate change will cost in terms of its more spectacular ramifications. There's nothing like investor self-interest to strip away pieties and denials.

 

TODAY ON THE SITE

For more on the relationships among risk, weather damage, insurers, and the environmental movement, check into the best collection of leads and links to be found on the Internet: Leonie Haimson's climate change department of our In The Trenches section.

 

Recent "Today" columns:

3/3: Salmon Farming
3/2: Our Friends the Duck Killers
2/27: Trust El Nino
2/26: That Darn Triple-A
2/25: Cutting a Deal on Endangered Species
2/24: Fire? Again?
2/23: Garbage
2/20: Population Rebellion in the Sierra Club
2/19: The Trouble With Cattle
2/18: Optimistic Feds and the Future of Kyoto
2/17: The New Great Game
2/13: Windmills
2/12: Stuart Eizenstat's Smart Bomb
2/11: Alligator in the Coal Mine
2/10: Inconvenient Public Opinion
2/9: Remember Penn Station
2/6: Adam Smith and Automobile Efficiency
2/5: Clean Water, Naturally
2/4: Roll, Storms, Roll
2/3: Land Purchase Fever
2/2: Groundhog Day in the Persian Gulf
1/30: Trees and Hormones
1/29: Things To Come (2)
1/28: Things To Come
1/27: 'Bye, 'Bye Brazil
1/26: Jaywalking and Jaydriving
1/23: Good Biotech, Bad Biotech
1/22: No More Roads
1/21: Swordfish

To access more "Today" columns, click "Archives" below.