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or renewal policies in selected areas. A more efficient risk sharing procedure would allow the capital markets to spread the risk among large numbers of investors to whom this exposure is a very small portion of their total risk exposure" (Goldman Sachs: Fixed Income Research Series on Insurance Linked Securities).

Professor Kenneth Froot of Harvard University, similarly points out some aspects of these market inefficiencies and why catastrophe risk is distributed inefficiently: "Another reason institutional arrangements may be inefficient is that the lack of objective information acts as a kind of barrier to entry. When objective information is costly to assemble, a greater investment is required to get into the underwriting business. Indeed, when objective information is in short supply, markets tend to be organized around relationships and reputation. By contrast, when objective information is plentiful, markets tend to be organized around transactions, with the players being more interchangeable. Because newcomers are discouraged from entering the market, the incumbents who specialize in underwriting cat risks, such as cat-risk reinsurers, can more easily charge high prices" (The Market for Catastrophic Risk: A Clinical Examination, August 1999).

However, information can be improved through institutional strengthening to increase the collection and dissemination of critical information. In the U.S. for example, the Insurance Services Office enables insurers to achieve and share economies of scale in the collection and analysis of data. Such institutions contribute to improved underwriting and pricing decisions on the part of individual insurers by making pooled data and analyses of pooled data widely available.

# **Global Reinsurance Capacity and the Caribbean Market**

1999 was the third highest loss year in terms of insured losses from catastrophes ($18 billion) with associated economic losses of $80 billion. Similarly, 1998 was the fourth highest loss year in terms of catastrophes causing global insured losses amounting to $15 billion and overall economic losses of $94 billion. This compares to catastrophe insured losses of approximately $27 billion in 1992 and $18.4 billion in 1994, the two years of highest losses to date. Of the $15 billion in losses in 1998, almost 80% were due to windstorm disasters. Catastrophe excess of loss reinsurance cover globally amounted to about $75 billion, and this represented on average, 40% of total coverage with the remainder held by primary insurers or under quota share treaties. The earthquake share of insured and total economic losses in 1999 was substantial, representing over 35% of total losses.

Thus, recent annual losses worldwide averaging around $20 billion would represent about 27% of the current excess of loss capacity and 1 1% of total available insurance and reinsurance before considering the net surplus capital in the industry. If future windstorms (hurricanes, typhoons, cyclones) increase, or if property affected were in a high value area such as Miami, Florida, there would likely be a squeeze on available reinsurance capacity as additional coverage to protect against large events would reach into the limits of global reinsurance capacity.

While potential devastating events globally could in aggregate cause up to $200 billion in insured losses, this scenario will, statistically speaking not occur in any single year or closely consecutive years. However, because of these constraints and the potential for worldwide catastrophes to significantly 'bite' into the reinsurance market's