Gio, Earthquakes and Hurricanes : An Overview of Catastrophe-Linked Securities and Other Innovations

During 1999, a number of major Australian insurance companies reported substantial losses flowing from the re-insurance of earthquake, hurricane and tornado risk. This article explains the structure of catastrophe-risk securitisations and other capital market alternatives to the reinsurance of catastrophe risk.The article also considers the major legal issue facing the implementation of these quot;alternative risk transferquot; products in Australia. One of the key features of these products is the assumption of catastrophe risk by parties that will not normally be licensed as insurers in Australia (for example, special purpose vehicles in catastrophe-risk securitisations and the providers of OTC catastrophe swaps). This assumption of risk may constitute the carrying on of an insurance business in Australia. In that situation, the party assuming the risk must be formally authorised to conduct an insurance business by the Australian Prudential Regulation Authority. Failure to obtain the requisite authorisation may lead to the imposition of criminal penalties. In addition, the arrangements under which catastrophe risk has been transferred are likely to be unenforceable in Australia