Risk managers to turn toward credit financing in future

Over the next 15 years, risk managers may be looking more towards credit financing as a means to backstop major catastrophes, rather than relying on more traditional forms of insurance or reinsurance, a panelist told participants at the 2006 RIMS Canada conference in Calgary. Felix Kloman of Risk Management Reports observed at the conference that “looking over the past five years at the major catastrophes and the funding of those catastrophes, it seems that the commercial, conventional insurance industry is playing a lower and lower part in the funding.”In particular, Kloman said he was thinking of the tsunami in southeast Asia that left almost half a million people homeless, the earthquake in Pakistan that killed more than 18,000 people, and the flooding damage in New Orleans caused by Hurricane Katrina.Kloman said he believed “the enormous growth in capital markets” is one reason why “credit financing, credit risk financing, has largely, almost completely bypassed the commercial insurance industry.” He added that such credit financing such as securitization, for example, or alternative risk transfer arrangements are seen to be “much more efficient, more reliable, and much better financed” than more traditional forms of insurance or reinsurance financing.Given this dynamic, Kloman speculated, “is there a probability, not just a possibility, that we will see over the next 15 years risk financing or risk funding replacing [traditional commercial insurance] as a way to finance risk?”I see that the future of risk management is probably moving in that direction at this time.”