Query by peterleewaih: What is Catastrophe Bond?
What is Catastrophe Bond?
Very best answer:
Answer by Bondmy
Catastrophe bonds (also known as cat bonds) are danger-linked securities that transfer a specified set of dangers from a sponsor to investors. They are usually structured as floating price corporate bonds whose principal is forgiven if specified trigger situations are met. They are normally utilized by insurers as an alternative to conventional catastrophe reinsurance.
For example, if an insurer has constructed up a portfolio of risks by insuring properties in Florida, then it may possibly wish to pass some of this threat on so that it can remain solvent soon after a big hurricane. It could merely acquire standard catastrophe reinsurance, which would pass the danger on to reinsurers. Or it could sponsor a cat bond, which would pass the threat on to investors. In consultation with an investment bank, it would produce a specific goal entity that would concern the cat bond.
Investors would get the bond, which may possibly pay them a coupon of LIBOR plus a spread, normally (but not always) between three and 20%. If no hurricane hit Florida, then the investors would make a wholesome return on their investment. But if a hurricane were to hit Florida and trigger the cat bond, then the principal initially paid by the investors would be forgiven, and as an alternative utilised by the sponsor to pay its claims to policyholders.
Michael Moriarty, Deputy Superintendant of the New York State Insurance coverage Division, has been at the forefront of state regulatory efforts to have U.S. regulators encourage the improvement of insurance coverage securitizations through cat bonds in the United States rather of off-shore, by way of encouraging two various methods — protected cells and particular goal reinsurance cars.
In August 2007 Michael Lewis, the author of Liar’s Poker and Moneyball, wrote an post about catastrophe bonds that appeared in The New York Occasions Magazine, entitled “In Nature’s Casino.”
Give your answer to this query beneath!
