BNP Paribas presents its thoughts on ways in which the energy industry may deal with the financial impact of natural disasters. Specifically we concentrate on transferring losses to capital markets investors using insurance linked securities. The presentation covers the following points:
an introduction to insurance linked securities. In this section we describe the development of so-called catastrophe bonds. This includes commentary on some of the key benefits associated with insurance linked securities. These include the fact that such transactions provide multi-year, fixed price, fully collateralised protection which is intended to mitigate the problems associated with a post-event market in which cover is either not available or only available at extremely high prices (as was the case in 2006 post hurricanes Katrina, Rita and Wilma);
a description of structures, mechanisms and pricing. We also describe the roles of the various third parties that are involved in such transactions;
a commentary on the types of natural disasters that may be protected against (mainly hurricane and earthquake, but potentially flood, freeze and wild fire) and the territorial scope of such disasters;
the reasons why energy companies should consider using catastrophe bonds as an alternative to other capital management alternatives. For example, they are useful not only for protecting against physical damage to a company's own physical assets. They may also be used as a form of business interruption protection by covering damage to an upstream company's assets that might lead to a loss of production on the part of a downstream company, with the transaction being implemented by the downstream company;
a case study of an actual catastrophe bond that was put in place on behalf of an energy company sponsor.
