Catastrophe bonds, or cat bonds, are bonds sold by an entity wishing to reduce its liability in the face of catastrophic losses such as the ones being caused by the seemingly increasingly violent natural storms occurring around the world. The market for cat bonds has been strong and growing as both the need for risk mitigation has risen as have the number of large investors searching for lucrative investment opportunities in an era of low interest rates.

An example of a cat bond is one issued by New York City’s transit authority in the aftermath of Superstorm Sandy. When insurance carriers, reeling from the costs associated with that storm, hesitated to underwrite the risk of future water surges, the transit authority issued a catastrophe bond in the amount of $200 million. The money will be used to repair damage to the subway system in the event of another flooding storm that reaches the same levels as Sandy within the next three years. If there is no serious storm within that period of time, the money will be returned to investors with an interest payment that—in 2012 for cat bonds—was running at 11% over the rate for Treasury Bills.

Today’s market size is the total value of catastrophe bonds outstanding as of October 1, 2013, worldwide.

Geographic reference: World
Year: 2013
Market size: $19 billion (up from $4 billion a decade ago)
Source: “Perilous Paper,” The Economist, October 5, 2013, pages 76-77.
Original source: Swiss Re Capital Markets
Posted on November 20, 2013