New Delhi: Swiss Reinsurance Co. Ltd, the world’s second largest reinsurer by premium, is in talks with India’s Central and state governments with a proposal to minimize risks to the exchequer and individuals from natural catastrophes such as earthquakes.
Two company officials said that with awareness about the economic impact of climate change growing, Swiss Reinsurance has asked the governments to tie up with the private sector.
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“We all agree on principles,” Michel M. Liès, member of group executive committee, client markets, said about the talks. Liès and Reto Schnarwiler, director at Swiss Reinsurance, were in New Delhi to participate in the ongoing World Economic Forum’s India Economic Summit.
Liès added that no concrete steps have been taken as yet. “The first steps are always difficult,” he said.
In 2007, some 335 natural catastrophes worldwide caused a combined loss of $64 billion (Rs2.89 trillion)—of which $40 billion was uninsured, according to a Swiss Reinsurance publication. Economic losses from natural catastrophes touched a record $230 billion in 2005. Of this, $150 billion was not insured. In recent years, emerging as well as developed economies have used reinsurers to share the risks from natural catastrophes.
In Mexico, the government created a natural catastrophe fund designed by Swiss Reinsurance. The reinsurance package has to be paid in the event of an earthquake exceeding a predetermined magnitude. Clearly defined parameters make sure the claims are released quickly, without negotiations.
In a sovereign catastrophe fund such as the Mexican quake fund, the reinsurer spreads the risk through the capital markets by selling bonds to cover the event.
If there is no catastrophe, the bondholders receive a relatively higher interest rate. If there is a catastrophe, the bondholders lose a large part of the principal or all of it.
Schnarwiler said fund managers are open to buying catastrophe bonds as the risks of a natural disaster are not correlated to other risks a typical portfolio faces—such as economic slowdown.
Buying catastrophe bonds in the international capital markets provides some fund managers with the right kind of diversification, he said.
Insurance complements other means to mitigate the impact of a natural disaster.
Besides the Central and state governments, Swiss Reinsurance is also in talks with non-governmental organizations about disaster reinsurance, he added.