Nature Is a Battlefield by Razmig Keucheyan

Author:Razmig Keucheyan [Keucheyan, Razmig]
Language: eng
Format: epub
Publisher: John Wiley & Sons, Inc.
Published: 2016-10-10T00:00:00+00:00

Nature as ‘real abstraction’

Financial modelling agencies are a crucial actor in the cat bonds mechanism. These agencies devote their efforts to catastrophe modelling. Their objective, in short, is to calculate nature. As we have said, the characteristic of the new risks in general, and climate risks in particular, is their underlying uncertainty, meaning both the difficulty in predicting their occurrence and the difficulty in evaluating their cost if they do take place. Traditional bonds, for example state treasury bonds, fluctuate only slowly, which makes them fairly reliable securities whose evolution can be predicted. Cat bonds are much more difficult to predict, given the complexity of the – both natural and social – factors that have to be taken into account and the fact that catastrophes usually take place without warning. This is the reason why issuing such bonds always requires the involvement of modellers, whose goal is, indeed, to reduce the degree of uncertainty as far as possible. There are a small number of risk-modelling companies worldwide, most of them in the United States. The main ones are AIR (Applied Insurance Research), Eqecat and RMS (Risk Management Solutions).61 These agencies develop models – and we will examine one specific example in a moment – in order to determine the probability of a natural event occurring and calculate its physical characteristics: wind speed, a cyclone's diameter, temperatures. These models also take into account the characteristics of the buildings and material assets of the implicated area: the materials used, the type of terrain, the risk reduction practices that have been implemented … The impact and cost of a catastrophe are, of course, closely linked to these factors. The combination of all this information makes it possible to estimate the cost of a catastrophe and the indemnities that the insurers would have to pay out and, consequently, to determine the price of a cat bond. The algorithms developed by these modellers are very mathematically sophisticated, reflecting the complexity of practices in the world of finance today. The modellers make use of methods like ‘simulation’ and ‘counter-history’, randomly generating virtual disasters so as to create a representation of their consequences and thus foresee these catastrophes in advance.62

These agencies frequently employ scientists who have come from the natural sciences in order to help them construct their models.63 The Bermuda-based company Nephila Capital Limited64 has thus made use of collaboration with oceanographers in order to model hurricanes in the Caribbean. With the help of climatologists and historians, Eqecat has created a database containing all the known catastrophes in the United States of the last three hundred years, as well as all those that have taken place in Europe over the last fifty years.65 This recourse to both natural and social history is one of the means that allow them to get rid of part of the uncertainty linked to catastrophes and to assign natural risks a price.

These risk-modelling companies do not only model climatic risks. They model all types of risk, including terrorist attacks – and particularly so after 11 September 2001.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.