With population growing in coastal, as well as hurricane, and earthquake-prone areas in the United States and scientists predicting a 100 percent chance of a major earthquake in the century before 2010, the insurance industry is faced with a potential megadisaster earthquake or hurricane that could produce insured losses in the $75,000,000,000 to $100,000,000,000 range.
Losses of that magnitude would wreak havoc to the industry (see Table 3 for a list of the ten largest catastrophes as of 1999). In 1996, the industry started to securitize its catastrophe risk by packaging insurance risk as securities that could be traded in the capital markets, whose combined $26 trillion is 80 times greater than the capital of the insurance industry. To date, the industry has been successful in selling more than $4 billion worth of catastrophe-linked securities, it plans to build on these successes and continue to spread catastrophe risks to the capital markets through the issuance of catastrophe securities. As the insurance industry continues to converge with the capital markets and the financial services industry, other lines of business are likely to be securitized.
GLOBALIZATION
While reinsurers have always had an international presence and brokers have moved in that direction, primary insurers, with one notable exception, have been reluctant to expand internationally. The rapid growth of computer technology, however, has transformed the world into one global economy, in which U.S. and foreign insurers must, along with all other businesses, compete.
DISTRIBUTION CHANNELS
The insurance industry continues to explore new distribution systems, including the Internet and formation of alliances with banks and other financial services organizations in an effort to become more efficient and focused on the customer, who today places as much importance on service and convenience, as on price.
