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 $7.1 billion in 2013, up from $5.9 billion in 2012, according to the GC Securities division of MMC Securities Corporation. Catastrophe bond risk capital outstanding rose to $18.6 billion during the same period, also a record high. GC Securities reported that catastrophe bond issuance was extremely strong in the first-half of 2014, with a record issuance of $5.7 billion. Total risk capital outstanding was at an all-time high of $20.8 billion. The firm noted that even with no further activity for the remainder of 2014, the year would still place as the fourth largest year in terms of new issuance.
TOP TEN CATASTROPHE BOND TRANSACTIONS, 2013
CATASTROPHE BONDS, ANNUAL RISK CAPITAL ISSUED, 2004-2013
CATASTROPHE BONDS, RISK CAPITAL OUTSTANDING, 2004-2013