Catastrophe bond market is set for strong growth

Significance As an alternative source of capital to traditional reinsurance, catastrophe (cat) bond issuance, a securitised type of insurance against catastrophe-linked losses, is reaching new highs. In the current low interest rate environment, there has been strong investor demand for these bonds. Impacts As natural disasters increase, the chance of a catastrophe occurring in these bonds' three-to-five-year lifespan rises, weighing on returns. If the number of natural disasters with a global impact rises, cat bond returns may become more correlated with other asset classes. More catastrophe bonds that meet ESG criteria are likely to be issued.

Global Catastrophe Bond Market and the Prospects of Its Formation in the Russian Federation

The article is devoted to the development of instruments for catastrophe risk financing. The state of the global market for disaster risk financing is analyzed in order to identify the main development trends and the possibilities of using conceptual approaches in the Russian practice of the financial market. It is proven that the development of the catastrophe bond market has prospects in conditions of permanent instability, since catastrophe bonds are unique and highly attractive due to the lack of correlation with macroeconomic events. It is suggested that the instruments of catastrophe risk financing can be considered in the context of the development of sustainable finance. The paper identifies the main problems slowing down the development of the Russian catastrophe bond market, and formulates proposals aimed at developing the market for insurance-linked securities (ILS) in the Russian Federation. Pilot CAT bonds emission prospectuses should be based on structured bonds, with elements of a subordinated bond. There is a need to introduce into the Russian legal field a term defining ILS as a category. It is proposed to register special purpose vehicles (SPVs) and catastrophe funds in Russian offshores. The Russian analogue of catastrophe funds should be a closed-end investment fund with high funding for qualified investors. It is proposed to update the formula for calculating the creation of and the procedure for using reserve funds, in particular with the use of catastrophe risk financing tools. A pilot issue of CAT bonds is proposed to be conducted on behalf of VEB.RF, as bonds sponsoring regions exposed to high natural risks. In the process of developing socially responsible investor practice and tools for socially responsible investments, it is suggested to establish a Russian “Green Index” and to create green ETFs in Russia. Due diligence (DD) approaches are recommended for decisions on issuing catastrophe bonds.

Multi-hazard parametric catastrophe bond trigger design for subduction earthquakes and tsunamis

This study presents trigger design methods and performance evaluations of multi-hazard parametric catastrophe bonds for mega-thrust subduction earthquakes and tsunamis. The catastrophe bonds serve as alternative disaster risk financing tools for insurers and reinsurers as well as municipalities and governments. Two types of parametric catastrophe bond trigger are investigated. A scenario-based method utilizes available earthquake source-based information, such as magnitude and location, whereas a station-intensity-based method can be implemented when seismic and tsunami hazard monitoring systems are in place in a region. The case study results, focusing on wooden buildings in Miyagi Prefecture, indicate that the station-intensity-based trigger methods outperform the scenario-based trigger methods significantly. Incorporating seismic and tsunami hazard information from multiple recording stations results in smaller trigger errors. The station-intensity-based methods are applicable to building portfolios at both municipality levels and regional levels.

Cat bonds market: Legal framework and perspectives

The paper analyses the legal aspects of the status of the catastrophe bonds market. Cat bonds are innovative instruments of securitization, which play a significant role in the financing of natural disasters. Some of the advantages of catastrophe bonds issue are the possibility of expanding risk transfer, reducing credit risk exposure and improving capital management. The aim of research is to point out the possible ways of efficient financing of catastrophic losses, such as the issue of catastrophe bonds. The paper will analyse the principal characteristics of cat bonds, as a significant instrument in connecting capital market with the insurance market. The author considered the current situation at the international and national level. Considering the tendencies in the international capital market, the author concluded that in the Republic of Serbia there is a legal gap and lack of harmonization of the existing legislation, which prevents the issue of catastrophe bonds.

Quantitative and Financial Aspects of Resilience Bonds in the Context of Recursive Insurance Contracts. A Cost Benefit Analysis

It is now well known that the world community must share the risks and hazards deriving from climate change and, more generally, from the environment. At the end of summer 2019, the European Bank for Reconstruction and Development (EBRD) issued the World’s first dedicated climate resilience bond and this confirms the thesis according to which financial, social and economic instruments are always most necessary for the development of society and to avoid that natural hazards can, as occurred in the past, cause extremely heavy damage with negative repercussions on every single area of a community. Starting from the characteristics of resilience bonds and reinsurance, the paper seeks to highlight the potential advantages that would derive from a systematic application of recursive contractual instruments (smart contracts). The authors focused on the study of the projection of financial and quantitative data of resilience and catastrophe bonds on the basis of a determined timeline, a fixed insurance premium, mitigation works related and connected to the main contract (insurance). In particular, the study concerns the correlation of the urban implementation of risk mitigation works with the specific catastrophic flood risk. The paper implements a purely economic and social cost-benefit analysis (ACB) in the sense that includes, among others, a public approach and the goal of maximizing social welfare, according to efficiency economic criteria. In a nutshell, the authors highlight as the main result not only the possibility, but also the convenience of the joint and multidisciplinary application of the quantitative method (resilience bonds) to infrastructure resilience.

Research on the Pricing of Global Drought Catastrophe Bonds

The rapid development of catastrophe bonds provides a new idea for catastrophe risk dispersion, since its traditional means fail to afford the economic losses caused by the global drought catastrophe. With the deepening of the concept of the community with a shared future for mankind, there is an opportunity to issue global drought catastrophe bonds through international cooperation. Based on the data of global drought catastrophe losses from 1900 to 2018, this paper selects 21 countries as the primary participants of international cooperation and studies the pricing of drought catastrophe bonds by the POT model and high quantile estimation. The results show that the first-class bond has a 10% occurrence probability with the trigger point of $252.54 million, and the second-class one has a 35% occurrence probability with the trigger point being $117.13 million. In line with high quartile estimates, the one-year principal-protected catastrophe bonds with a face value of $1,000 are valued at $957.14 and $939.29, respectively. Besides, the principal portion of the lost bonds is $912.50 and $783.04, while the total of it is $867.86 and $626.79, respectively.

Insurance Options: Beating the benchmark. Are Catastrophe Bonds more profitable than Corporate Bonds?

In this paper we establish a comparison between one of the most traded financial derivatives in the markets, the so-called catastrophe bonds (abbreviated as cat bonds) and the corporate bonds. In the first section, we start from a brief definition as well as some basic concepts. In section two, we will enumerate the type of investors to whom these products might interesting and how to price them. Afterwards, in section three we move onto the analysis of the trading rule proposed, that is, the comparison with Corporate bonds, our benchmark, in terms of expected returns. In sections four and five, we will point out some key issues on how the credit risk associated to these products can be reduced and, finally, in the last section, we will conclude with some discussions and remark the state-of-the-art research on this field.