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 reached a record high of $8.03 billion in 2014, up from $7.1 billion in 2013, according to the GC Securities division of MMC Securities Corporation. Included in the 2014 number was the largest catastrophe bond in history, a $1.5 billion issue sponsored by Florida's Citizens Property Insurance Corp. Catastrophe bond risk capital outstanding rose to $22.9 billion during the same period, also a record high. The first quarter, which historically is particularly active in terms of issuance for the property/casualty market, was especially so for 2015, with $1.49 billion of risk capital issued—the highest first-quarter volume in history, according to GC Securities.
TOP 10 CATASTROPHE BOND TRANSACTIONS, 2014
CATASTROPHE BONDS, ANNUAL RISK CAPITAL ISSUED, 2005-2014
CATASTROPHE BONDS, RISK CAPITAL OUTSTANDING, 2005-2014