Narrator: Since 1980, stats indicate that weather related disasters such as windstorms and flooding have increased worldwide by 350 percent. ILSTV spoke with Glenn McGillvray, Managing Director for the Institute for Catastrophic Loss Reduction and asked him about the impact of a major disaster, like Hurricane Katrina.

Glenn McGillvray: Well, you’re right when you know Katrina – you don’t have to go much further than that to see what kind of impact we can have with a thousand or two thousand people dead and just absolutely billions of dollars of damage. That’s what we’re seeing.

Unfortunately with natural catastrophes in the developing world, they usually take lives. But in the developed world – our world – they cost money. And that’s what we’re going to see. We might not see the huge events that take the kinds of lives that, let’s say, the Boxing Day 04 tsunami caused, but we’re just going to see some really, really expensive events. Of course, California’s at risk of a really big earthquake. Our own west coast here in Canada is also at risk of a major major earthquake. And north Atlantic hurricanes – if a really big one hits Miami, and it surely will one of these days,then we’re going to see major costs there that may out shadow Katrina. Also, the same goes with an Asian typhoon in some of the developed countries. Or a big winter storm in Europe that mimic hurricanes quite a bit – they’re very similar to hurricanes.

The other thing is that cities are getting bigger and wealth is increasingly becoming concentrated, so when we do get an event, it’s costing billions and billions of dollars. That’s not a rarity anymore.

Narrator: One way to prevent property damage due to flooding is to have the proper backflow valves installed on your sewer system. Glenn explains.

Glenn McGillvary: What we strongly believe in is having backflow valves in your sewer main to prevent a sewage backup in these stormy times. They’re very effective devices. It’s an infrastructure mechanism; it goes on the main sewer line going out of the house. A lot of municipalities provide funding or reimbursements for such devices. Other municipalities like Edmonton and Winnipeg have bylaws where every new house built after 1999 in Edmonton has to have a valve. Every new house builtin Winnipeg since, I believe, 1979 needs a water valve. So they’re very effective. Also, sump pumps – very effective as well.

We also strongly believe in making sure the landscaping is properly done so it takes water away from the house, not bringing it to the house. Other things, like how people use their basement, so if they’re not protected properly, you may not want to have a fully finished basement with the laminate floor and big screen televisions. If you’re going to do that, then definitely put in a backflow valve because it could save you a lot of grief.

Narrator: The increase of disasters has sparked a resurgence of catastrophe bonds – a way of passing insurance risk onto the deeper pockets of the capital market.

Glenn McGillvary: These have been around for about 10 or 15 years but back then there was not a lot of take with these types of instruments. But now, each year billions and billions of dollars of catastrophe bonds are being issued. Because the insurance market and the reinsurance market only has so much capital, but the capital market has way more money than the insurance and reinsurance industries, so we can tap into that by issuing these catastrophe bonds. They’re becoming more and more common; they used to only be written for the really big mega-risks out there, like the California earthquake, Tokyo earthquake, that sort of thing. Now we’re seeing them being written for tier two and tier three types of risks because they’re getting better at putting these bonds together.They’re very, very innovative things.

With cat bonds, you’re basically transferring your insurance risk over to investors. Investors can buy a piece of a bond and they can take a very low-risk position, they can take a medium-risk position or a higher risk position. If an event happens as described in the cat bond, the investor may lose all or part of his or her investment in the bond. However, if the catastrophe doesn’t take place, the investor gets a healthy return on the bond. It’s all about risk and what the investor is prepared to take on.