Long Story Short
Extra Credit: Catastrophe Bonds – A Diversifier Like No Other
Apr 24, 2024
Experts Andre Rzym and Tarek Abou Zeid discuss catastrophe bonds in this episode. They cover topics such as the low correlation with major asset classes, higher yields, $3-5 billion of insured losses in 2023, diversification benefits, market dynamics, historical recovery rates, and the growth of the market into new perils like cyber.
31:36
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Quick takeaways
- Catastrophe bonds provide diversification due to low correlation, high yields, and limited overall drawdowns.
- Cat bonds offer unique risk management solutions for insurers and reinsurers against billion-dollar natural disasters.
Deep dives
Understanding the Concept of Catastrophe Bonds (Cat Bonds)
Catastrophe bonds, also known as cat bonds, emerged in the 1990s in response to significant natural disasters depleting insurers' capital. These bonds allow insurers and reinsurers to access capital markets to bolster their capital base. The mechanics involve a special purpose vehicle (SPV) issuing bonds to investors, with the sponsor (insurer or reinsurer) paying a spread to the SPV. If no triggering event occurs during the bond's typically three-year maturity, investors receive their proceeds back. If a triggering event occurs, the proceeds go to the sponsor, ensuring no credit risk between investors and sponsors.
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