Cat bonds can meet Silk Road need: PhoenixCRetro

There is a potentially big opportunity for the insurance-linked securities (ILS) markets to develop parametric cat bonds that could cover some of the growing risks in Eastern Europe and Western areas of Asia, according to Kirill Savrassov, chief executive of PhoenixCRetro.

Savrassov told Monte Carlo Today that for a wide range of historical reasons insurance penetration remains very low in various countries of the former Soviet Union, as well as Turkey and parts of former Yugoslavia. Those areas are highly vulnerable to earthquakes, such as the ones that devastated Armenia and Tashkent over the past 50 years.

Savrassov pointed out that a huge amount of investment is being poured into the region by the Chinese government, which is seeking to expand its economic footprint with its Belt and Road Initiative, an economic project to essentially recreate the ancient Silk Road that linked Europe to Asia.

This requires the creation of a huge of amount of infrastructure, such as roads, railways, bridges and warehouses, as well as living quarters for local workers. All of these would very vulnerable to a major earthquake, not to mention the losses that could be caused by business interruption costs.

“Private markets have the solution to this, in the form of parametric cat bonds,” said Savrassov. “This is a classic win-win partnership and it’s very much the future of the development of the ILS class.

“It’s in the interests not just of investors or ILS fund managers, but in the interests of international agencies and financial institutions such as the UN Development Programme and the Asian Development Bank, as well as the general area.

“To give an example of the scale of the vulnerability, the Belt and Road scheme has not yet been completed, but 10,000+ trains a year already pass through existing railways from China to Europe.

“The amount of disruption to that from an earthquake in say, Kazakhstan or Uzbekistan, could be economically catastrophic,” he concluded.