THE SECURITIZATION OF INSURANCE RISK: CATASTROPHE BONDS
Catastrophe (cat) bonds are one of a number of innovative risk transfer products that have emerged as an alternative to traditional insurance and reinsurance products. Insurers and reinsurers typically issue cat bonds through a special purpose vehicle, a company set up specifically for this purpose. Cat bonds pay high interest rates and diversify an investor's portfolio because natural disasters occur randomly and are not associated with economic factors. Depending on how the cat bond is structured, if losses reach the threshold specified in the bond offering, the investor may lose all or part of the principal or interest.
Catastrophe bond issuance in 2015, at $5.92 billion, was less than the record high of $7.9 billion in 2014, according to the GC Securities division of MMC Securities Corp. Catastrophe bond issuance was markedly low in the fourth quarter of 2015, in contrast with a record first quarter. Catastrophe bond risk capital outstanding fell slightly to $22.44 billion in 2015, from $22.77 billion in 2014. GC Securities expects in the absence of a major market disruption, issuance in 2016 will be similar to the last several years as new sponsors incorporate alternative capital into their strategies.
TOP 10 CATASTROPHE BOND TRANSACTIONS, 2014
CATASTROPHE BONDS, ANNUAL RISK CAPITAL ISSUED, 2006-2015
CATASTROPHE BONDS, RISK CAPITAL OUTSTANDING, 2006-2015