Catastrophe bond investment remains strong as resilience bonds emerge

Catastrophe bonds help to cover municipalities and other entities in the face of natural disasters such as floods, earthquakes or tropical storms.

Investment in catastrophe bonds remained high in the third quarter of 2015 despite the risks associated with these assets, a new report found.

According to research from GC Securities, $650 million in catastrophe bonds was issued during the third quarter, bringing the 2015 total to $4.49 billion as of Sep. 30. The report found the third quarter of 2015 was the fourth-highest quarter on record for cat bond issuance.

"Catastrophe bonds help cover claims following natural disasters."

Catastrophe bonds help insurance companies and other entities, such as municipal agencies, cover claims in the event of high losses related to natural disasters. The bonds effectively transfer risk from the issuer to the investor. If a disaster occurs, the investor forfeits their principal, which is used by the issuers to cover their losses. However, if no disaster occurs before the bond matures, investors see their money returned with higher-than-average interest. 

In 2015, the majority of the issued cat bonds were related to risk of tropical storm or earthquake coverage. However, GC Securities is projecting increased geographic diversification in bonds, meaning risks will likely be tied to a greater variety of potential disasters.

"As we progress through the fourth quarter, over 70 percent of outstanding catastrophe bonds are exposed to U.S. tropical cyclones and earthquakes," Cory Anger, global head of ILS structuring for GC Securities, said in a statement. "Although these perils in particular continue to drive the [insurance-linked securities] market, we expect that 2016 will see new perils, new geographies, new types of protection structures and new sponsors emerge."

Changing nature of cat bonds
Catastrophe bonds were first utilized in the 1990s after insurers paid out a high volume of claims following Hurricane Andrew and the Northridge, California, earthquake. These assets have remained popular with investors due to their quick maturity time, typically three to five years, and with insurers and reinsurers who are able to hedge their potential losses.

However, according to The Wall Street Journal, some reinsurance firms are beginning to offer resilience bonds alongside their catastrophe bonds.

"Resilience bonds would provide infrastructure funding for disaster-prone areas."

Resilience bonds would provide infrastructure funding for municipalities, public utilities and other entities in disaster-prone areas. For example, these bonds could be used to fund the construction of seawalls or flood barriers, the Journal reported.

Zurich-based Swiss Reinsurance Company is the first firm to announce a resilience bond program, though specifics of its implementation have not been provided. According to a statement from the company, resilience bonds would remain in place as long as the infrastructure project was under construction. The funds would provide the issuers financial protection if a disaster did strike, while also getting protective construction projects underway.  

However, unlike traditional cat bonds, the resilience bonds would be adjusted as the infrastructure projects began to offer protection and reduce risk. Comparing its policy to health insurers who lower premiums if policyholders quit smoking or exercise frequently, Swiss Re explained issuers would be able to pay lower premiums to investors as construction projects began to offer protection and vulnerabilities were reduced. 

In a statement, Alex Kaplan, senior client manager of global partnerships at Swiss Re, said the program will help to control the financial risk of catastrophes while also encouraging investment in the infrastructure that can mitigate those risks.

"With growing urbanization and increasing climate change impacts, the challenges our cities and communities face globally are evolving and the solutions we provide must evolve with them," Kaplan said. "Resilience bonds could not only support a faster recovery, but would also help to improve national and city preparedness in a very substantial way, and fast-track resilience from idea to reality."

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Cybersecurity provision expected to pass into legislation

Opponents of a new cybersecurity provision say it will aid the government in illegal survelliance.

After several years of debate, the U.S. may soon pass new cybersecurity legislation as a provision buried in an omnibus spending bill makes its way through Congress.

As The Associated Press reported, the Cybersecurity Act of 2015 is designed to encourage private companies to share technical information about hacking attempts with each other and the federal government.

"The provision most closely resembles the controversial Cybersecurity Information Sharing Act."

The new provision combines House and Senate versions of the cybersecurity bill, however it most closely resembles the Senate version, also known as the Cybersecurity Information Sharing Act. CISA drew heavy criticism from civil liberties groups and technology companies including Apple, Adobe, Google and Twitter. Opponents of CISA said it increased government surveillance of U.S. citizens and added to the vulnerability of sensitive user data.

There are some differences between the new provision and CISA. The new language allows the president to create "portals" where private companies can hand over data directly to law enforcement. While the president could theoretically enable such portals within the FBI or CIA, the act only allows the president to designate a federal agency other than the Homeland Security Department to receive this data if DHS cannot and doing so is completely necessary. However, the president is specifically prohibited from appointing the Department of Defense, and thus the National Security Agency, for this role.

Businesses and the government would also be required to scrub any private user information from the data.

The privacy debate surrounding cybersecurity
Addressing Congress, House Intelligence Committee member Rep. Adam Schiff, D-Calif, said the new provision allows companies to protect themselves from cyberattack but also added privacy protections missing from CISA.

"We have to measure this against the daily invasion of our privacy by these hackers," Schiff said. "Those who believe that perfect should be the enemy of the good, have to justify how they're willing to accept rampant hacking into our privacy and do nothing about it."

"The ACLU said the act would aid the government in secret monitoring of citizens."

However, the American Civil Liberties Union said the cybersecurity provision would enable companies to aid the government in secret monitoring of citizens "under the guise of cybersecurity."

"This would allow companies to share large amounts of private consumer information with government agencies, including possibly the FBI and NSA," the ACLU wrote in a statement. "This information can be used for criminal prosecutions unrelated to cybersecurity, including the targeting of whistleblowers under the Espionage Act."

According to WIRED, by slipping the cybersecurity provision into the spending bill, Congress has reduced the likelihood of a president veto or public debate. Additionally, the new provision allows data shared for cybersecurity purposes to be used by law enforcement under set conditions. Under CISA, such usage required proof of "an imminent threat," but with the new provision only proof of a "specific threat" is required.

As CBS News reported, President Obama is expected to pass the spending bill, including the cybersecurity provision. According to the White House, the president was pleased with the provision, which he felt increased cyberprotections "while carefully safeguarding privacy, confidentiality and civil liberties."


Congress delays ACA’s Cadillac Tax for two years

Many policy holders are already seeing higher deductibles on their company-sponsored health plans.

As part of its recently improved budget deal, Congress passed legislation that delays implementation of the Affordable Care Act's Cadillac Tax for two years.

The spending bill, which passed the House in a 316-113 vote and the Senate with a 65-33 vote, would delay implementing the Cadillac Tax until 2020. Originally scheduled to go into effect in 2018, the Cadillac Tax was designed to restrict employers from offering high-cost employer-sponsored health plans by placing a 40 percent excise tax on plans exceeding $10,200 for individual coverage or $27,500 for family coverage annually.

"Opponents of the Cadillac Tax see its delayed implementation as a sign of its eventual repeal."

Some opponents of the Cadillac Tax see its delayed implementation as a sign of its eventual repeal. In a statement, James A. Klein, president of the American Benefits Council, said support for repealing the tax is diverse and includes patient advocates, unions and private and public sector employers.

"We applaud Congress for passing a two-year delay of the 'Cadillac Tax' and thank the Congressional champions who made this possible," Klein said. "The delay provides a much-needed down payment toward the ultimate goal of full repeal."

However, Forbes contributor Brian Blase argued the Cadillac Tax would actually remedy a major problem with the Affordable Care Act: the tax exclusion for employer-sponsored health insurance leads to employers offering overly expensive insurance. This leads to lower wages for workers who see more of their pre-tax income going to pay for their employer-sponsored insurance plans.

Controlling health care cost
According to a report from the Mercatus Center at George Mason University, this tax loophole also creates market distortions and leads to $300 billion in untaxed revenue each year.

"Many of the United States' current health-care-related problems – from lack of choice and competition to rising costs – stem in part from the tax exemption for employer-provided health insurance," the Mercatus report concluded.

"Proponents of the Cadillac Tax argued it would help to slow U.S. health care spending."

As reported by Business Insurance, group health care plan costs are increasing each year, and proponents of the Cadillac Tax argued it would help to slow U.S. health care spending. Even though the tax is delayed for now, many insurance providers had already begun restructuring their offerings in order to lower their rates and avoid the 40 percent levy. According to a report from the Kaiser Family Foundation, 53 percent of large employers with 200 employees or more have already analyzed their plans to see if they would be hit with a high-cost plan tax and many have made changes to lower plan expense. The Kaiser report also found 8 percent of large employers had already switched to lower-cost plans.

However, as CNN noted, many employer-sponsored plans have also begun passing on the cost of the Cadillac Tax to employees by increasing deductibles and other out-of-pocket expenses. Wellness programs, on-site clinics and other costly programs may also be eliminated as employers look for ways to control the health care costs they are absorbing. 

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Cybersecurity industry to grow in 2016 and beyond

The need for cybersecurity will only increase in 2016, especially in vulnerable sectors such as the health care industry.

The cybersecurity industry saw a lot of growth in 2015, and worldwide information security spending is projected to increase.

According to a report from Gartner, Inc., companies will invest $75.4 billion in data and information protection by the end of 2015, 4.7 percent more than what was spent in 2014. Much of the push comes from increased instances of government-backed cyberattacks, new legislation that is raising an awareness of cybersecurity and high-profile data breaches. Companies are making more investment in cloud security tools and threat intelligence, the report found.

"Interest in security technologies is increasingly driven by elements of digital business, particularly cloud, mobile computing and now also the Internet of Things, as well as by the sophisticated and high-impact nature of advanced targeted attacks," Elizabeth Kim, research analyst at Gartner, said in a statement.

"Analysts predicted cyberprotection spending will reach $170 billion by 2020."

Additionally, cybersecurity analysts speaking with RT news projected cyberprotection spending will reach $170 billion by 2020, with North America and Europe remaining the top markets. The need for increased protection will be propelled by the increasingly sophisticated nature of attacks and the constantly changing risks that come with advances in new technologies, the news outlet reported.

The Internet of Things, which includes the internet connections embedded into common physical objects from cars to smartwatches to coffee pots, can also increase network vulnerability, RT news noted.

What to expect in the coming year
As CNBC reported, 2016 will also likely be a big year for cyberattacks, as well as investment in protection. Speaking with the news outlet, Fortinet global security strategist Derek Manky said hackers are expected to target infrastructure as well as personal medical devices. Comparing it to "an arms race in terms of security," Manky cautioned that connected devices will be especially vulnerable intrusion points for networked systems.

CNBC noted many experts are also predicting an increase in malware aimed at cloud and cloud-based systems. Ghostware systems designed to mask signs of a cyberattack will also be more frequently deployed, allowing hackers continued access to private and public systems.

As USA Today reported, the health care industry will remain one of the most vulnerable sectors. As the news outlet reported, the black market sale of medical information is more valued than credit or debit card numbers. Medical identity theft can also be more difficult for victims to recover from and can pose a potentially life-threatening situation if medical information of theft and victim becomes intertwined.

The recent passing of the Cybersecurity Information Sharing Act may be able to provide some assistance to private and public organizations combating cyberattacks. Though critics of the act contend it may pose threats to vulnerable user data and allow for illegal government monitoring, others argue the legislation encourages information sharing that may help to stop cyberattacks in real time. As Forbes commentator Robert Rose noted, the act may be able to pave the way for "an emergency-call system" for cyberattacks, as well as increased multi-sector private-public cooperation.


Insurers tackle challenges of climate change

Climate change and the possibility of increasing natural disasters could present unique challenges for insurers.

Conversations about the weather may typically be exercises in small talk, but not for the insurance industry. In fact, weather-related claims are going to pose an increasing challenge for providers and policyholders alike.

According to a report from Munich Re Group, natural disaster claims resulted in around $27 billion in financial losses for insurers in 2015. Though 2015 actually had the lowest monetary losses of any year since 2009, disasters including floods, tornados and earthquakes still led to substantial weather-related damage.

"In terms of financial losses, we were somewhat fortunate in 2015," explained Peter Höppe, Head of Munich Re's Geo Risks Research Unit in a statement. "Strong tropical cyclones frequently only hit sparsely populated areas or did not make landfall at all. In the North Atlantic, El Nino helped to curtail the development of heavy storms. Measures to reduce loss susceptibility have also had a positive effect."

As the Munich report noted, while the financial losses of 2015 were not as great, the frequency of natural disasters was higher than in previous years. For the first time, more than 1,000 loss events were reported to insurers, though the Munich study noted this may be due to improvements in communications and science that allowed more minor events to be recognized and recorded.

The challenge of climate change
As Reuters reported, the increasing frequency of both weather-related disasters and ensuing fatalities has led insurers to push lawmakers for more legislative action to combat climate change. In addition to increases in payouts in disaster-prone countries where insurance is more common, the increase in claims makes it harder for insurers to provide coverage to developing countries where assistance is most needed, Reuters noted.

"The proportion of insured losses for catastrophes in developing and emerging countries remains very low," Munich board member Torsten Jeworrek told Reuters. "The insurance industry is exploring new avenues to close this gap in cover and thus to help people better cope with material losses after a catastrophe."

As Insurance Journal noted, the Reinsurance Association of America is also pressuring its members, as well as lawmakers, to be better informed on the latest research in climate change and what it means for the reinsurance industry. Speaking with the publication, RAA president Frank Nutter stressed climate change should be thought of as a scientific issue instead of a political one, noting that the insurance industry is grounded in making informed decisions based on science.

"Our industry is science based," Nutter explained to Insurance Journal. "The actuarial sciences, and in this case the natural sciences."

However, Nutter also noted his association is pressuring for political developments based on scientific data, including federal incentives that would call for changes to land-use planning and building codes in order to make cities more resistant to weather-related disasters. The RAA is also supporting increased funding for climate studies facilitated by the National Oceanic and Atmospheric Administration and the National Aeronautics and Space Administration.