(Reuters) — The growing market for catastrophe bonds has bolstered the insurance industry to the extent it could cope with a $100 billion disaster bigger than Hurricane Katrina, the head of Zurich Insurance Group Ltd.'s general insurance division said.
Known as "alternative capital," the money investors are pouring into catastrophe bonds — sold by insurers to share the risk they take on for natural disasters — and other areas of the insurance industry is increasing competition and putting pressure on traditional players.
But the new capital also means the industry is more robust and able to cope with what Zurich's general insurance chief Michael Kerner sees as a growing trend of large catastrophe losses caused by climate change.
"The insurance and the reinsurance industry are at very strong levels of solvency, there is lots of capital in the business," Mr. Kerner told Reuters. "The industry can handle a $100 billion event, all the claims get paid, it's not a big solvency issue."
"We do need to access all forms of capital to be able to provide the appropriate risk transfer solutions. In this context, some of this alternative capital is really a good thing, because it has expanded the capacity of the insurance industry to be able to handle these bigger events," Mr. Kerner said.
The natural catastrophe bond market issued record volumes during the second quarter, Willis Capital Markets & Advisory said in July, with investors attracted to the sector in search of higher returns as interest rates remain at rock-bottom levels.
Katrina, in 2005, was one of the biggest hurricanes ever recorded and the costliest natural disaster, racking up $80 billion in damages for the insurance industry, according to 2013 data from reinsurer Swiss Re Ltd.
Zurich took a hit of around $600 million after tax and reinsurance from the hurricane in 2005.
The first half of 2014, however, has been relatively calm, with floods, storms and other natural disasters causing around $42 billion in damage worldwide, well below the prior-year period and a 10-year average, German reinsurer Munich Reinsurance Co. said in July.
"The area of risk potentially is that some of this capital is not actually being asked to respond," Mr. Kerner said. "This is capital dedicated to catastrophe losses, but we have not had a major catastrophe in a while, so this capital has not yet been tested."
The capital will be able to stand the strain of a major natural catastrophe, Mr. Kerner said, adding the question was whether investors would be willing to replenish it afterwards.