PDF Ebook Catastrophe Risk Financing in the US and the EU: A Comparative Analysis of Alternative Regulatory Approaches
The threat of “natural” and “man-made” disasters continues to grow in many parts of the world do to a confluence of factors, including population growth and economic development, climatic changes and weather cycles, geologic activity, and political unrest. Figures 1 and 2 underscore the growing significance of catastrophe risk in terms of both actual and potential catastrophe losses. 1 The nature and severity of the catastrophe threat varies among countries and regions of the world but its implications raise certain common issues and increasing global integration intensifies the inter-dependencies between countries and the rippling effects of a disaster. At its core, the problem of catastrophe risk poses a number of challenges to mitigating its effects, financing the costs that are incurred, and responding to the needs of those affected.
The regulation of insurance and reinsurance companies, among other government policies, has significant implications for the management and financing of catastrophe risk. At present, the risk and cost of catastrophes are borne by many “stakeholders” in different ways in the interaction of public and private sectors that influence their incentives and economic efficiency. This paper examines the different regulatory systems and government policies of the United States (US) and the European Union (EU) generally and how they address catastrophe risk financing specifically. The link between the fundamental philosophies and elements of these regulatory systems and their treatment of risk financing is important. Current policies and the prospects for reforming any specific policy depend on the government frameworks in which they reside.
There are reasons to prefer maximum reliance on private risk financing to the
extent that is feasible and efficient but governments necessarily play some role and can either encourage or discourage private financing. Hence, it is important to assess government policies towards catastrophe risk financing to determine whether they enhance or diminish economic efficiency. In this context, the regulation of insurance and reinsurance markets and government insurance programs for catastrophe perils can have significant implications for private financing and risk management. There are a number of insights that can be gained from examining these issues that are important for the subject jurisdictions as well as other nations and economies affected by catastrophe risk. To provide some additional context, advocates of international insurance regulatory standards have tended to embrace a “three pillar” approach to regulation (as described in International Actuarial Association, 2004) that encompasses:
Pillar I: Minimum Financial Requirements
Pillar II: Supervisory Review Process
Pillar III: Measures to Foster Market Discipline
It is important to consider this framework in evaluating regulatory systems in different jurisdictions.
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