You do not have permission to edit this page, for the following reasons:

This IP address has been blocked from editing Wikipedia.
This does not affect your ability to read Wikipedia pages.
Most people who see this message have done nothing wrong. Some kinds of blocks restrict editing from specific service providers or telecom companies in response to recent abuse or vandalism, and can sometimes affect other users who are unrelated to that abuse. Review the information below for assistance if you do not believe that you have done anything wrong.

The IP address or range 54.163.0.0/16 has been blocked (disabled) by ‪Blablubbs‬ for the following reason(s):

The IP address that you are currently using has been blocked because it is believed to be a web host provider or colocation provider. To prevent abuse, web hosts and colocation providers may be blocked from editing Wikipedia.
You will not be able to edit Wikipedia using a web host or colocation provider because it hides your IP address, much like a proxy or VPN.
We recommend that you attempt to use another connection to edit. For example, if you use a proxy or VPN to connect to the internet, turn it off when editing Wikipedia. If you edit using a mobile connection, try using a Wi-Fi connection, and vice versa. If you are using a corporate internet connection, switch to a different Wi-Fi network. If you have a Wikipedia account, please log in.
If you do not have any other way to edit Wikipedia, you will need to request an IP block exemption.

How to appeal if you are confident that your connection does not use a colocation provider's IP address:
If you are confident that you are not using a web host, you may appeal this block by adding the following text on your talk page: ((unblock|reason=Caught by a colocation web host block but this host or IP is not a web host. My IP address is _______. Place any further information here. ~~~~)). You must fill in the blank with your IP address for this block to be investigated. Your IP address can be determined here. Alternatively, if you wish to keep your IP address private you can use the unblock ticket request system. There are several reasons you might be editing using the IP address of a web host or colocation provider (such as if you are using VPN software or a business network); please use this method of appeal only if you think your IP address is in fact not a web host or colocation provider.

Administrators: The IP block exemption user right should only be applied to allow users to edit using web host in exceptional circumstances, and requests should usually be directed to the functionaries team via email. If you intend to give the IPBE user right, a CheckUser needs to take a look at the account. This can be requested most easily at SPI Quick Checkuser Requests. Unblocking an IP or IP range with this template is highly discouraged without at least contacting the blocking administrator.

This block will expire on 17:28, 10 March 2024.

Even when blocked, you will usually still be able to edit your user talk page, as well as email administrators and other editors.

For information on how to proceed, please read the FAQ for blocked users and the guideline on block appeals. The guide to appealing blocks may also be helpful.

Other useful links: Blocking policy · Help:I have been blocked
Your IP address is in a range that has been blocked on all Wikimedia Foundation wikis. The block was made by ‪Jon Kolbert‬. The reason given is Open proxy/Webhost: See the help page if you are affected .
- Start of block: 18:27, 12 November 2023
- Expiry of block: 18:27, 12 November 2028
Your current IP address is 54.163.179.242. The blocked range is 54.163.0.0/16. Please include all above details in any queries you make. If you believe you were blocked by mistake, you can find additional information and instructions in the No open proxies global policy. Otherwise, to discuss the block please post a request for review on Meta-Wiki. You could also send an email to the stewards VRT queue at stewards@wikimedia.org including all above details.

You can view and copy the source of this page:

((Cleanup bare URLs|date=August 2022))
((More citations needed|date=April 2011))
[[File:Destruction following hurricane andrew.jpg|300px|thumb|right|The aftermath of Hurricane Andrew in [[Lakes by the Bay, Florida]].]]
'''Catastrophe bonds''' (also known as '''cat bonds''') are risk-linked [[securities]] that transfer a specified set of risks from a sponsor to [[investor]]s.  They were created and first used in the mid-1990s in the aftermath of [[Hurricane Andrew]] and the [[Northridge earthquake]].

Catastrophe bonds emerged from a need by insurance companies to alleviate some of the risks they would face if a major catastrophe occurred, which would incur damages that they could not cover by the invested [[Insurance premium|premiums]]. An insurance company issues [[bond (finance)|bonds]] through an [[investment bank]], which are then sold to investors.  These bonds are inherently risky, generally [[Bond credit rating|BB]],<ref>((cite web |url=http://investolope.com/investing/investing-101/bonds-general-information-on-bonds-and-what-are-they/ |title=Bonds - General Information On Bonds And What Are They? |date= |accessdate=January 19, 2016 |archive-url=https://web.archive.org/web/20160129041706/http://investolope.com/investing/investing-101/bonds-general-information-on-bonds-and-what-are-they/ |archive-date=January 29, 2016 |url-status=dead ))</ref> and usually have maturities less than 3 years.  If no catastrophe occurred, the insurance company would pay a [[Coupon (bond)|coupon]] to the investors.  But if a catastrophe did occur, then the [[Principal sum|principal]] would be forgiven and the insurance company would use this money to pay their claim-holders.  Investors include [[hedge fund]]s, catastrophe-oriented funds, and [[asset manager]]s. They are often structured as [[Floating rate note|floating-rate bonds]] whose principal is lost if specified trigger conditions are met.  If triggered the principal is paid to the sponsor. The triggers are linked to major natural catastrophes.  Catastrophe bonds are typically used by [[insurer]]s as an alternative to traditional catastrophe [[reinsurance]].

For example, if an insurer has built up a portfolio of risks by insuring properties in Florida, then it might wish to pass some of this risk on so that it can remain solvent after a large [[hurricane]].  It could simply purchase traditional catastrophe reinsurance, which would pass the risk on to reinsurers.  Or it could sponsor a cat bond, which would pass the risk on to investors.  In consultation with an [[investment bank]], it would create a [[special purpose entity]] that would issue the cat bond.  Investors would buy the bond, which might pay them a [[coupon (bond)|coupon]] of [[LIBOR]] plus a spread, generally (but not always) between 3 and 20%.  If no hurricane hit Florida, then the investors would make a positive return on their investment.  But if a hurricane were to hit Florida and trigger the cat bond, then the principal initially contributed by the investors would be transferred to the sponsor to pay its claims to policyholders. The bond would technically be in default and be a loss to investors.<ref>((cite web |url=http://financialservices.house.gov/media/pdf/100802d2.pdf |title=GAO-02-941 Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors Affecting Their Use |accessdate=January 19, 2011 |archive-url=https://web.archive.org/web/20110203235747/http://financialservices.house.gov/media/pdf/100802d2.pdf |archive-date=February 3, 2011 |url-status=dead ))</ref>

Michael Moriarty, Deputy Superintendent of the [[New York State Insurance Department]], has been at the forefront of state regulatory efforts to have U.S. regulators encourage the development of insurance [[securitization]]s through cat bonds in the United States instead of off-shore, through encouraging two different methods—protected cells and special purpose reinsurance vehicles.<ref>((cite web|url=http://commdocs.house.gov/committees/bank/hba84418.000/hba84418_0.HTM |title=Catastrophe Bonds: Spreading Risk |publisher=Commdocs.house.gov |date=October 8, 2002 |accessdate=January 19, 2011))</ref>  In August 2007 [[Michael Lewis (author)|Michael Lewis]], the author of ''[[Liar's Poker]]'' and ''[[Moneyball]]'', wrote an article about catastrophe bonds that appeared in ''[[The New York Times Magazine]]'', titled "In Nature's Casino."<ref>((cite news| url=https://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?pagewanted=print | work=The New York Times | first=Michael | last=Lewis | title=In Nature's Casino | date=August 26, 2007))</ref>

==History==

The notion of securitizing catastrophe risks became prominent in the aftermath of [[Hurricane Andrew]], notably in work published by [[Richard Sandor]], Kenneth Froot, and a group of professors at the [[Wharton School]] who were seeking vehicles to bring more risk-bearing capacity to the catastrophe reinsurance market.  The first experimental transactions were completed in the mid-1990s by [[American International Group|AIG]], [[Hannover Re]], St. Paul Re, and [[USAA]].

The market grew to $1–2 billion of issuance per year for the 1998–2001 period, and over $2 billion per year following [[September 11 attacks|9/11]].  Issuance doubled again to a run rate of approximately $4 billion on an annual basis in 2006 following Hurricane Katrina, and was accompanied by the development of [[reinsurance sidecar]]s.  Issuance continued to increase through 2007, despite the passing of the post-Katrina "hard market", as a number of insurers sought diversification of coverage through the market, including [[State Farm]], [[Allstate]], [[Liberty Mutual]], [[Chubb Corp.|Chubb]], and [[Travelers Companies|Travelers]], along with long-time issuer USAA.  Total issuance exceeded $4 billion in the second quarter of 2007 alone.

It is also possible to adapt these instruments to other contexts. [[Citigroup]] developed the Stability Note in 2003, which protects the issuer against catastrophic stock market crashes; it was later adapted to protect against hedge fund collapses.<ref>((cite news|last=Dhillon|first=Hardeep|title=Betting on Stability|url=http://www.risk.net/structured-products/feature/1513121/betting-stability|accessdate=3 December 2013|newspaper=Risk|date=1 May 2007))</ref> Professor [[Lawrence A. Cunningham]] of [[George Washington University]] suggests adapting cat bonds to the risks that large auditing firms face in cases asserting massive securities law damages.<ref>[[Lawrence A. Cunningham]], Securitizing Audit Failure Risk: An Alternative to Damages Caps, ''William & Mary Law Review'' (2007)</ref>  Other innovative uses of cat bond structures have been proposed as well.

==Investors==

Investors choose to invest in catastrophe bonds because their return is largely uncorrelated with the return on other investments in [[fixed income]] or in [[equities]], so cat bonds help investors achieve diversification.  Investors also buy these securities because they generally pay higher interest rates (in terms of spreads over funding rates) than comparably rated corporate instruments, as long as they are not triggered.

Key categories of investors who participate in this market include [[hedge fund]]s, specialized catastrophe-oriented funds, and asset managers.  [[Life insurer]]s, reinsurers, banks, [[pension fund]]s, and other investors have also participated in offerings.

A number of specialized catastrophe-oriented funds play a significant role in the sector, including Twelve Capital,<ref>((cite web |url=http://www.artemis.bm/ils_fund_managers/twelve-capital-ag/ |title = Twelve Capital AG - Artemis ILS Fund Managers Directory))</ref> [[Credit Suisse]], [[Juniperus Capital]], Coriolis Capital,<ref>((cite web |url=http://www.artemis.bm/blog/2015/01/02/predictions-for-2015-diego-wauters-ceo-coriolis-capital/ |title = Predictions for 2015: Diego Wauters, CEO, Coriolis Capital - Artemis.bm|date = 2 January 2015))</ref> [[Axa Investment Managers|AXA Investment Managers]], Plenum Investments and [[Clariden Leu]].  Several mutual fund and hedge fund managers also invest in catastrophe bonds, among them [[Massachusetts Mutual Life Insurance Company|Oppenheimer Funds]], TIAA-Cref, Pine River Capital, and [[PIMCO]].

==Ratings==

Cat bonds are often rated by an agency such as [[Standard & Poor's]], [[Moody's]], or [[Fitch Ratings]].  A typical corporate bond is rated based on its [[probability of default]] due to the issuer going into [[bankruptcy]].  A catastrophe bond is rated based on its probability of default due to a qualifying catastrophe triggering loss of principal.  This probability is determined with the use of [[catastrophe model]]s.  Most catastrophe bonds are rated below [[investment grade]] (BB and B category ratings), and the various rating agencies have recently moved toward a view that securities must require multiple events before an occurrence of a loss in order to be rated investment grade.

==Structure==
Most catastrophe bonds are issued by special purpose reinsurance companies domiciled in the [[Cayman Islands]], [[Bermuda]], or Ireland.  These companies typically participate in one or more reinsurance treaties to protect buyers, most commonly insurers (called "cedants") or reinsurers (called "retrocedents").  This contract may be structured as a [[Derivative (finance)|derivative]] in cases in which it is "triggered" by one or more [[Index (economics)|indices]] or event parameters (see below), rather than losses of the cedant or retrocedent.

Some bonds cover the risk that multiple losses will occur.  The first-second event bond (Atlas Re) was issued in 1999.  The first third event bond (Atlas II) was issued in 2001.  Subsequently, bonds triggered by fourth through ninth losses have been issued, including Avalon, Bay Haven, and Fremantle, each of which apply tranching technology to baskets of underlying events.  The first actively managed pool of bonds and other contracts ("Catastrophe [[Collateralized debt obligation|CDO]]") called Gamut was issued in 2007, with Nephila as the asset manager.
<!-- Unsourced image removed: [[File:Cat Bond Structure.jpg|720px]] -->

==Trigger types==

The sponsor and investment bank who structure the cat bond must choose how the principal impairment is triggered.  Cat bonds can be categorized into four basic trigger types.<ref>Cat bonds can be categorized into different basic trigger types, some of which are listed here: https://www.air-worldwide.com/Publications/AIR-Currents/2016/Modeling-Fundamentals--So-You-Want-to-Issue-a-Cat-Bond/</ref>  The trigger types listed first are more correlated to the actual losses of the insurer sponsoring the cat bond.  The trigger types listed farther down the list are not as highly correlated to the insurer's actual losses, so the cat bond has to be structured carefully and properly calibrated, but investors would not have to worry about the insurer's claims adjustment practices.

'''Indemnity''': triggered by the issuer's actual losses, so the sponsor is indemnified, as if they had purchased traditional catastrophe reinsurance.  If the layer specified in the cat bond is $100 million excess of $500 million, and the total claims add up to more than $500 million, then the bond is triggered.

'''Modeled loss''': instead of dealing with the company's actual claims, an exposure portfolio is constructed for use with catastrophe modeling software, and then when there is a large event, the event parameters are run against the exposure database in the cat model.  If the modeled losses are above a specified threshold, the bond is triggered.

'''Indexed to industry loss''': instead of adding up the insurer's claims, the cat bond is triggered when the insurance industry loss from a certain peril reaches a specified threshold, say $30 billion.  The cat bond will specify who determines the industry loss; typically it is a recognized agency like PCS. "Modified index" linked securities customize the index to a company's own book of business by weighting the index results for various territories and lines of business.

'''Parametric''': instead of being based on any claims (the insurer's actual claims, the modeled claims, or the industry's claims), the trigger is indexed to the natural hazard caused by nature.  So the parameter would be the windspeed (for a hurricane bond), the [[peak ground acceleration|ground acceleration]] (for an earthquake bond), or whatever is appropriate for the peril.  Data for this parameter is collected at multiple reporting stations and then entered into specified formulae.  For example, if a typhoon generates windspeeds greater than X meters per second at 50 of the 150 weather observation stations of the Japanese Meteorological Agency, the cat bond is triggered.

'''Parametric Index''': Many firms are uncomfortable with pure parametric bonds due to the lack of correlation with actual loss. For instance, a bond may pay out based on the wind speed at 50 of the 150 stations mentioned above, but the insurer loses very little money because a majority of their exposure is concentrated in other locations. Models can give an approximation of loss as a function of the speed at differing locations, which are then used to give a payout function for the bond. These function as hybrid Parametric / Modeled loss bonds, and have lowered basis risk as well as more transparency.<ref>This is becoming increasingly popular – http://www.thefreelibrary.com/A.M.+Best%27s+Methodology:+Gauging+the+Basis+Risk+of+Catastrophe+Bonds.-a0154337660</ref>

==Market participants==

Examples of cat bond sponsors include insurers, reinsurers, corporations, and government agencies.  Over time, frequent issuers have included [[USAA]], [[Scor SE]], [[Swiss Re]], [[Munich Re]], [[Liberty Mutual]], [[Hannover Re]], [[Allianz]], and [[Tokio Marine Nichido]]. Mexico is the only national sovereign to have issued cat bonds (in 2006, for hedging earthquake risk and in 2009 and 2012, a multi structure instrument that covered earthquake and hurricane risk).<ref>Luis Flores Ballesteros. "Using international financial markets for funding disaster recovery- The case of an Earthquake Catastrophic Bond in Mexico" Latinoamerica Puede Sep. 2008:54 Pesos October 6, 2008. <((cite web |url=http://latinamericapuede.org/2008/10/06/using-international-financial-markets-for-funding-disaster-recovery-the-case-of-an-earthquake-catastrophic-bond-in-mexico/ |title=Using international financial markets for funding disaster recovery- the case of an Earthquake Catastrophic Bond in Mexico &#124; Latinoamérica…puede |accessdate=2011-03-08 |url-status=dead |archiveurl=https://web.archive.org/web/20110819204152/http://latinamericapuede.org/2008/10/06/using-international-financial-markets-for-funding-disaster-recovery-the-case-of-an-earthquake-catastrophic-bond-in-mexico/ |archivedate=2011-08-19 ))></ref> In June 2014, the [[World Bank]] issued its first catastrophe bond linked to natural hazard (tropical cyclone and earthquake) risks in sixteen Caribbean countries,<ref>http://treasury.worldbank.org/cmd/htm/FirstCatBondLinkedToNaturalHazards.html</ref> and in 2017 it launched the [[Pandemic Emergency Financing Facility]] to provide funding in case of [[pandemic]] disease.

To date, all direct catastrophe bond investors have been [[institutional investor]]s, since all broadly distributed transactions have been distributed in that form.<ref>((cite web|url=http://www.insurancejournal.com/news/national/2006/11/21/74498.htm |title=Catastrophe Bond Investors to Gain from Mild Hurricane Season |publisher=Insurancejournal.com |date=November 21, 2006 |accessdate=January 19, 2011))</ref>  These have included specialized catastrophe [[bond fund]]s, [[hedge fund]]s, [[investment advisor]]s (money managers), [[life insurer]]s, reinsurers, [[pension fund]]s, and others.  Individual investors have generally purchased such securities through specialized funds.

Investment banks and Inter Dealer Brokers that are active in the trading and issuance of catastrophe bonds include [[Aon Corporation|Aon]] Securities Inc., [[BNP Paribas]], [[Deutsche Bank]], [[Swiss Re Capital Markets]], GC Securities (a division of MMC Securities Corp. and affiliate of [[Guy Carpenter]]), [[Goldman Sachs]], [[Rewire Securities]], [[Munich Re]] Capital Markets, [[Jardine Lloyd Thompson]] Capital Markets and [[Willis Group Holdings|Willis]] Capital Markets.  Some of them also make [[secondary market]]s in these bonds.

==Patents==

There are a number of issued US [[patents]] and pending US [[patent application]]s related to catastrophe bonds.<ref>Examples of US patents and pending applications related to catastrophe bonds. ((US patent|6321212)) ''Financial products having a demand-based, adjustable return, and trading exchange therefore'' [http://worldwide.espacenet.com/publicationDetails/biblio?DB=EPODOC&II=0&ND=3&adjacent=true&locale=en_EP&FT=D&date=20050929&CC=US&NR=2005216386A1&KC=A1 US patent application 2005/216386 ''Flexible catastrophe bond'']</ref>

==See also==
((Div col|colwidth=22em))
* [[Insurance-Linked Securities (ILS)]]
* [[Catastrophe modeling]]
* [[Fixed income]]
* [[Reinsurance]]
* [[Risk management]]
* [[Reinsurance sidecar]]
* [[Alternative risk transfer]]
* [[Year loss table]]
((div col end))

==References==
((Reflist|2))

==External links==
* [http://www.artemis.bm/deal_directory/ Artemis Catastrophe Bond Deal Directory – list of all major cat bond deals]
* [https://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html "In Nature's Casino"] (by Michael Lewis), [[New York Times Magazine]], 8/26/07
* [https://web.archive.org/web/20070717052833/http://rmictr.gsu.edu/Papers/WP04_6.pdf Cat Bond Pricing Using Probability Transforms (by Shaun S. Wang)]
* [https://web.archive.org/web/20071221114951/http://www.cbsacny.org/article.html?aid=535 Financial Innovations in Insurance – Panel Discussion in New York, January 2008]
* ((cite journal|last=Polacek|first=Andy|year=2018|title=Catastrophe Bonds: A Primer and Retrospective|journal=Chicago Fed Letter|volume=2018|issue=405|publisher=[[Federal Reserve Bank of Chicago]]|issn=0895-0164|doi=10.21033/cfl-2018-405|url=https://www.chicagofed.org/publications/chicago-fed-letter/2018/405|access-date=November 8, 2023))

((Insurance))

[[Category:Bonds (finance)]]
[[Category:Offshore finance]]
[[Category:Types of insurance]]
[[Category:Reinsurance]]

Pages transcluded onto the current version of this page (help):

Catastrophe bond (edit)
Template:Ambox (view source) (template editor protected)
Template:Cite journal (view source) (protected)
Template:Cite news (view source) (protected)
Template:Cite web (view source) (protected)
Template:Cleanup bare URLs (view source) (template editor protected)
Template:Digits (view source) (template editor protected)
Template:Div col (view source) (template editor protected)
Template:Div col/styles.css (view source) (template editor protected)
Template:Div col end (view source) (template editor protected)
Template:Find sources mainspace (view source) (template editor protected)
Template:Hlist/styles.css (view source) (protected)
Template:Insurance (edit)
Template:Main other (view source) (protected)
Template:More citations needed (view source) (template editor protected)
Template:Navbox (view source) (template editor protected)
Template:Nowrap (view source) (protected)
Template:Reflist (view source) (protected)
Template:Reflist/styles.css (view source) (protected)
Template:Replace (view source) (protected)
Template:US patent (view source) (template editor protected)
Module:Arguments (view source) (protected)
Module:Category handler (view source) (protected)
Module:Category handler/blacklist (view source) (protected)
Module:Category handler/config (view source) (protected)
Module:Category handler/data (view source) (protected)
Module:Category handler/shared (view source) (protected)
Module:Check for unknown parameters (view source) (protected)
Module:Citation/CS1 (view source) (protected)
Module:Citation/CS1/COinS (view source) (protected)
Module:Citation/CS1/Configuration (view source) (protected)
Module:Citation/CS1/Date validation (view source) (protected)
Module:Citation/CS1/Identifiers (view source) (protected)
Module:Citation/CS1/Utilities (view source) (protected)
Module:Citation/CS1/Whitelist (view source) (protected)
Module:Citation/CS1/styles.css (view source) (protected)
Module:Find sources (view source) (template editor protected)
Module:Find sources/config (view source) (template editor protected)
Module:Find sources/links (view source) (template editor protected)
Module:Find sources/templates/Find sources mainspace (view source) (template editor protected)
Module:Message box (view source) (protected)
Module:Message box/ambox.css (view source) (protected)
Module:Message box/configuration (view source) (protected)
Module:Namespace detect/config (view source) (protected)
Module:Namespace detect/data (view source) (protected)
Module:Navbar (view source) (protected)
Module:Navbar/configuration (view source) (protected)
Module:Navbar/styles.css (view source) (protected)
Module:Navbox (view source) (template editor protected)
Module:Navbox/configuration (view source) (template editor protected)
Module:Navbox/styles.css (view source) (template editor protected)
Module:String (view source) (protected)
Module:Unsubst (view source) (protected)
Module:Yesno (view source) (protected)

Return to Catastrophe bond.

Retrieved from "https://en.wikipedia.org/wiki/Catastrophe_bond"