Privatised catastrophe: Bets on the weather and natural disasters

Governments can no longer afford to compensate the victims of earthquakes, hurricanes and tsunamis, or rebuild infrastructure. The tax revenues just aren’t there. So they’re selling insurance bonds to private investors. In an article recently published by Le Monde Diplomatique, the opening paragraphs of which we publish here, Razmig Keucheyan charts the horrendous new developments of finance capitalism.

Last November, super-typhoon Haiyan struck the Philippines, killing more than 6,000 people, damaging or destroying 1.5m homes and causing $13bn damage. Three months later, insurance brokers Munich Re and Willis Re, accompanied by representatives of the UN international strategy for disaster reduction (UNISDR), presented a new financial product to members of the Philippine senate: it was intended to make up for the supposed deficiencies of state provision against major climate-related disasters. The Philippines risk and insurance scheme for municipalities (PRISM) is a high-yield security that municipalities would offer to private investors (1), who would receive an attractive rate of interest, subsidised by the state, but would lose their investment in the event of a disaster of a given scale and severity.

Weather derivatives and other climate insurance products are popular. Besides Asian countries, Mexico, Turkey, Chile and the US state of Alabama, severely affected by Hurricane Katrina in 2005, have adopted them. The promoters of these instruments claim the idea is to entrust insurance against natural disasters (premiums, risk assessment, victim compensation) to the financial sector. But why is the financial sector so interested in nature when nature is showing ever-clearer signs of fatigue?

For centuries Earth has provided our economic system with raw materials and resources at low cost, and the planet’s ecosystem has been able to absorb the waste generated by industrial production. But these functions no longer work so well. Not only are raw material and waste management costs rising, but increasingly frequent and severe disasters are pushing up the cost of insurance. This affects industrial profits: the ecological crisis is not only a reflection, but may also be a trigger, of the crisis in capitalism.

In this context, financialisation looks like a way out: insurance and reinsurance companies (see Well covered) are coming up with new ways to spread climate risk, one of which is securitisation — though this proved disastrous in the US mortgage market. One of the strangest new products is the “cat bond” (catastrophe bond). A bond is a debt security that is negotiable and has a market price. Cat bonds do not relate to debt contracted by a state to pay for the renovation of infrastructure, or by a private enterprise to finance innovation, but to natural phenomena. They relate to events that may or may not take place and which, if they do happen, are likely to cause extensive human and material losses. They are intended to spread risk over space and time, so as to reduce its potential impact; because the financial markets are global, securitisation ensures maximum spread.

The cat bond was invented in 1994, after natural disasters caused huge losses (Hurricane Andrew in Florida in 1992, the Northridge earthquake in California in 1994) and forced the insurance industry to find new resources. Since then around 200 cat bonds have been issued (27 in 2007 alone), with a total value of $14bn.

You can read the rest of the article here.