Flood Risk Wheeze That Could Drown City Bonuses; CITY COMMENT

The Evening Standard (London, England), April 12, 2007 | Go to article overview

Flood Risk Wheeze That Could Drown City Bonuses; CITY COMMENT


THE Thames Gateway is that vast tract of land stretching from Canary Wharf down

to the Dartford river crossing. It is where the planners hope to build enough homes over the next 20 years to accommodate the extra three-quarters of a million people they expect to be living in London by that time, though there is one little-discussed problem with this. At a recent conference on climate change, one speaker pointed out that even a modest increase in sea levels could make the whole area very prone to flooding and most of these yet-to-be-built homes could therefore be uninsurable.

Naturally enough, climate change has got the insurance industry worried because many of the bills from the consequent extreme weather conditions are likely to land in its lap. It is a cost it is unwilling and perhaps unable to bear entirely on its own. Hence its active search for finding new ways to cover the risk, the most interesting of which emerged earlier this week when the German insurer Allianz successfully sold $150 million of bonds which are triggered to pay up in the event of a designated flood or specified disaster.

This spreads the potential losses well beyond the insurance company, but the intriguing thing is how far this could go.

Currently the buyers of such bonds are sophisticated professional investors, but there is no reason why, using the internet, the risk could not be spread much wider still to the extent, even, that one would no longer need the insurance company.

A crude model of how this might work already exists with Betfair, the online gambling site where participants bet against each other. Some people ask for odds on, for example, the result of a football match while it is in progress, or the chances of an England cricketer getting to his century. Others supply the odds and take the bet. There is no bookmaker in the middle to price the trade and bring both sides of the bet together. The only issue is secure payment between counterparties who do not know each other, and in this case it is solved by credit cards and deposits.

The insurance model would simply require the owner of a risk offering it on the net, probably with a suggested price to see if there were any takers or with a request that someone out there make an offer. Agreed, it does sound far-fetched and ignores the complexity and asymmetry of information of most insurance contracts. …

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