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.
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Cat Bond Purpose and Mechanism
- Cat bonds exist to help insurers and reinsurers access capital markets, increasing their capital base.
- Investors buy bonds from an SPV, which interacts with the insurer/reinsurer seeking coverage.
Minimal Credit Risk
- Cat bond investors face minimal credit risk tied to the sponsor (insurer/reinsurer).
- The sponsor also has no credit exposure to the investor.
Evaluating Cat Bond Losses
- Judging individual cat bond losses is misleading; the market cap has grown steadily since 2001.
- Cat bonds cover global perils, including US wind, quake, and other global events.