Catastrophe Bonds

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Catastrophe Bonds By Kirill Graminschi The trouble with Catastrophe Bonds The article presents the difficulties insurance companies face when they are issuing catastrophe bonds. Do they efficiently hedge against large-scale disasters? It is very difficult hedging against catastrophic losses. Japan’s March earthquake, tsunami and nuclear disaster threat could cost the insurance industry between $21 and $34 billion. The catastrophe bonds are not helping much the insurance companies, although they were designed to do so. Catastrophe bonds have limits on type and location of the disaster they will cover. A large number of catastrophe bonds covered the losses only in Tokyo, although the actual losses occurred far away from there. In…show more content…
Considering all the risk stated above, the insurance companies are still issuing the catastrophe bonds. In my point of view the issuance of catastrophe bonds by insurers is a successful financial hedging technique. Even though the investors are having large returns on risk-linked securities and only a small number of them lost their principle, the purpose of these instruments is to provide coverage for highly improbable risks. The benefit of these bonds is that they allow the insurance companies to secure a layer of coverage for their worst case scenarios, which may not be available if traditional reinsurance is used. Catastrophe bonds help to diversify the protection capacity and supplement traditional reinsurance. The insurance companies are transferring major risks and thus have more capital to underwrite new business, therefore using the bonds to diversify their sourcing of reinsurance. The issuance of risk-linked securities is a great strategy in supplementing traditional reinsurance, but these bonds still need to prove their value in the long-run. In conclusion, I would not agree with Mr. Niklaus Hilti’s words: “from the perspective of insurers and reinsurers, traditional reinsurance is clearly the better hedge." The catastrophe bonds are carefully designed to provide insurers and reinsurers the capital they need for
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