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insurers have attempted to limit the risk to their surplus (capital), leading to local availability problems for the insureds".

The problem of dealing with catastrophic risks is also expressed by Goldman Sachs in its Fixed Income Research series on insurance linked securities: _"Most insurance coverage involves individual events that have a significant economic impact on a single insured entity but are small relative to the reserves of the insurance company providing coverage. The insurance company is able to pool such independent risks and charge premiums based on its administrative costs and its actuarial assessment of the events. In contrast, natural catastrophes such as hurricanes and earthquakes involve a large number of insured entities and have the potentialfor very large aggregate claims. In contrast to the typical 'highftrequency, low severity' risks that insurance companies are easily able to manage, such 'lowfrequency, high severity' risks present particular difficulties "._ Currently, the insurance industry's capital and surplus in the world stands at close to US$ 1 trillion equivalent. However, major global reinsurers recognize that disaster insurance is severely lacking in many regions of the world, given the actuarial estimates of future events and potential damages. In contrast to the insurance industry, the global capital market capacity stands at approximately US$ 42 trillion or close to 50 times the capital available from the insurance industry, estimated at US$ 850 billion.<sup>4</sup> Therefore, given the increasing concentrations of property values insured as well as scientific projections showing recurring cycles of increased hazard frequencies of hurricanes, it only seems logical that insurance coverage for mega catastrophes will eventually seek capital market financing to complement the limited insurance capital if major events indeed materialize in the next two decades. The instrumentalities for this are elaborated further in chapter IV. Compounding the problem is that dollar-value concentrations of property in catastrophe prone urban areas continue to increase requiring higher and higher amounts of coverage.

At the present time, reinsurance<sup>5</sup> is readily available for most islands in the East Caribbean (ESC) and prices dropped from end-1994 through 1999. However, this situation could change rapidly if a major catastrophe hits the region, or if there is a tightening in world catastrophe reinsurance markets as has begun in early 2000. There are predictions that rates could harden following the relatively active 1999 hurricane season and windstorms at the global level. Not surprisingly, given this volatility in the marketplace, pricing is also highly volatile. After Hurricane Andrew in 1992 which impacted the Florida and Caribbean markets, there was a severe tightening in world catastrophe reinsurance markets, and prices for primary insurance more than doubled in some areas. Since that time, the market has eased and rates continued to fall during 1999. The following rates for a small ESC island, however, are typical of pricing during the 1990s.

4Source: Goldman Sachs, U.S. Insurance Services Office; FIBV International Federation of Stock Exchanges; Guy Carpenter / Marsh McLennan.

5The term "reinsurance" refers to the insuring of an insurance company's underwritten portfolio by another larger insurer (the reinsurer). That is, after a primary (or local) insurance company insures its policy holders, it then 'buys' insurance for part of its portfolio from a larger (usually global) company. This is referred to as "reinsurance", i.e., the transferring of part of the original insurer's portfolio to a 'reinsurer' at a price (the reinsurance premium), with the result that the reinsurer takes the risk for that part of the portfolio transferred.