Are You Taking Advantage of Climate Risk Management Products?

Posted on by Paul Ellis

I believe the big reinsurance companies will continue to lead the way for all capital markets participants in dealing with climate risk. In March and April of 2013 I blogged about how some these global companies were assessing risks and developing climate risk management products. Here’s an update:

Cat bonds

What are cat bonds? Short for catastrophe bond, they’re high-yield, risk-linked securities created to transfer specific risks from a sponsor to investors. They were first used after Hurricane Andrew in the mid-1990s. Let’s take a look at 2014’s outstanding $1.5 billion issue for Citizens Property Insurance Corporation of Florida, the largest catastrophe (cat) bond ever issued.* Originally marketed as a $400 million offering by Everglades Re, it was increased in two stages due to strong investor demand and pays a coupon rate of 7.5%. Citizens Property Insurance, by the way, was created by the Florida legislature to provide property insurance for homeowners who could not obtain coverage elsewhere.

Swiss Re issued the first solar hedge in China in 2014 to help protect the power generation revenues of Golden Concord Holdings Ltd. (GCL) against adverse weather conditions.** The one year contract compensates the plant operator in periods of low sunshine against the loss of revenue from power sales. The hedge was issued through Alltrust Property Insurance and was the first of three such hedges Swiss Re provided to different Chinese clients last year.

Regulatory Scrutiny

The need for climate risk products will only increase as regularly scrutiny ramps up. Both the SEC and the National Association of Insurance Commissioners (NAIC) are asking corporations about their exposure to weather and climate risk. There is also concern in the agriculture and utility sectors about exposure to weather and climate risk, according to Barney Schauble of Nephila Advisors, an investment firm that has been active in the weather markets for over 10 years.***

The reinsurance industry is sorting out when and how to protect business and personal asset values against weather and climate risk. Regulators want more data from corporations to adequately assess investor risk regarding the same.

As media coverage of climate risk increases, advisors may want to ask clients what concerns they have about its impact on their investments. Explaining how clients can incorporate ESG analysis into their investment selection differentiates you from the competition and helps keep your clients ahead of the curve.