Catastrophe Insurance Risks: The Role of Risk-Linked Securities Page: 3 of 8
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Madame Chairwoman and Members of the Subcommittee:
I am pleased to be here today to discuss the results of our work on the
potential for risk-linked securities to address catastrophic risks arising
from natural events such as hurricanes and earthquakes. Population
growth, real estate development, and rising real estate values in hazard-
prone areas increasingly expose our nation to higher losses-both insured
and uninsured-from natural catastrophes than in the past. This exposure
increases pressure on businesses; individuals; and federal, state, and local
governments to assume ever-larger liabilities for losses associated with
natural catastrophes. A series of natural disasters in the 1990s, including
Hurricane Andrew and the Northridge earthquake, raised questions about
the financial capacity of the insurance industry to cover large catastrophes
without limiting coverage or substantially raising premiums, and called
attention to ways of raising additional sources of capital to help cover
catastrophe risk. Participants in the insurance industry and capital
markets developed new capital market instruments, risk-linked securities,
which both expand insurance and reinsurance capacity and provide an
alternative to traditional property-casualty reinsurance. We were asked to
analyze the role of risk-linked securities in the coverage of catastrophe
risk and factors affecting their use.
Today I will talk about (1) what catastrophe risk is and how the insurance
and capital markets provide coverage for such risks; (2) how risk-linked
securities, particularly catastrophe bonds, are structured; and (3) how key
regulatory, accounting, tax, and investor issues might affect the use of
these securities. Our overall objective is to provide the Committee with
information and perspectives to consider as it moves forward in this
important and complex area. For a fuller discussion of these points, I refer
you to our report entitled Catastrophe Insurance Risks: The Role of Risk-
Linked Securities and Factors Affecting Their Use (GAO-02-941), which
was released today at this hearing.
Even though we did not have statutory audit or access-to-records
authority with respect to the involved private-sector entities, we obtained
extensive documentary and testimonial evidence from various groups,
including insurance and reinsurance companies, investment banks,
investors, rating agencies, firms that develop models to analyze
catastrophic risks, regulators, and academic experts. However, we were
not able to verify the accuracy of data provided by these groups.
Our statement covers a number of issues affecting risk-linked securities,
but we make no recommendations. While we have identified factors that
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United States. General Accounting Office. Catastrophe Insurance Risks: The Role of Risk-Linked Securities, text, October 8, 2002; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc289539/m1/3/: accessed December 9, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.