The natural disaster has been a major threat to human civilization since a long time ago. The extreme disasters not only cause the casualties but also make incalculable economic losses. In 1992 and 1994, the United States was invaded by Hurricane Andrew and the Northridge earthquake which resulted in tens of billions of dollars loss. In recent years, because of human over-exploitation, the frequency and severity of natural disasters have gradually increased. According to a report published by Swiss Reinsurance Company, it points out that there were average annual150 man-made disasters and 100 natural disasters during the period 1970-2010. . The economic losses and casualties caused by a natural disaster in the long run are much more serious than those caused by man-made disasters. Traditionally, the reinsurance is used for transferring catastrophe risk to the counterparty (reinsurer) . Recently, due to the frequent and severity natural disasters, the supply of reinsurance has decreased, but the reinsurance price has increased sharply. For example, the flood in Thailand in 2011 caused severe loss for the local reinsurance market, forcing investors to evacuate from the market. The alternative risk transfer (ART) is invented in order to create more diversified methods for risk spreading and to provide more underwriting capacity. Through combining the alternative risk transfer with the capital market, the risk response would be more likely to deal with the catastrophe claims successfully and effectively.
Taiwan has successfully issued the first catastrophe bond in 2003.The Taiwan regulator predicts that IFRS 4 could be implemented in 2013. In addition, as for the financial system such as restriction on foreign investment, we encounter the challenge of not having well-defined norms for alternative risk transfer in terms of law. How to reform the system of accounting, finance and law to create suitable environment for issuing alternative risk transfer products. .
This article, firstly, aims to introducing the characteristics of alternative risk transfer products. Then, it provides some suggestions relating to how to improve systems of accounting, finance, and law in Taiwan to create more appropriate environment to issue alternative risk transfer products efficiently.