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Catastrophe Risk: U.S. and European Approaches to Insure Natural Catastrophe and Terrorism Risks

GAO-05-199 Published: Feb 28, 2005. Publicly Released: Mar 30, 2005.
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Highlights

Natural catastrophes and terrorist attacks can place enormous financial demands on the insurance industry, result in sharply higher premiums and substantially reduced coverage. As a result, interest has been raised in mechanisms to increase the capacity of the insurance industry to manage these types of events. In this report, GAO (1) provides an overview of the insurance industry's current capacity to cover natural catastrophic risk and discusses the impacts of the 2004 hurricanes; (2) analyzes the potential of catastrophe bonds--a type of security issued by insurers and reinsurers (companies that offer insurance to insurance companies) and sold to institutional investors--and tax-deductible reserves to enhance private-sector capacity; and (3) describes the approaches that six European countries have taken to address natural and terrorist catastrophe risk, including whether these countries permit insurers to use tax-deductible reserves for such events. We provided a draft of this report to the Department of the Treasury and the National Association of Insurance Commissioners. Treasury provided technical comments that were incorporated as appropriate.

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Accounting standardsBonds (securities)Comparative analysisEmergency preparednessForeign governmentsHomeland securityHurricane AndrewHurricanesInsuranceInsurance companiesInsurance premiumsInsurance regulationNatural disastersProposed legislationRisk managementTerrorismCatastrophe bonds