Preview

Catastrophe Bonds

Good Essays
Open Document
Open Document
934 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Catastrophe Bonds
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 1990s these risk-linked securities where designed to spread the risk to financial investors after Hurricane Andrew hit Florida and the quake in Northridge, California. The market works in the following way: an insurance company issues bonds to financial investors. During the life of the security the insurer is paying to the investor a coupon interest rate. If the loss is not occurring, the insurer returns the amount paid when the bond matures. If the loss occurs, the insurer is not returning any money and is using the funds paid by the investor to cover the losses.
Many investors are satisfied with the returns on catastrophe bonds which results in unsatisfactory results of financial hedging to insurance companies.
Despite the fact that catastrophe bonds are not providing the protection that the insurance companies would like to see on their books, there are no signs that the insurers might drop that option. According to Credit Suisse’s head of Insurance Linked Strategies Niklaus Hilti the long-term future of the catastrophe bonds in unpredictable. He also added that from the outlook of insurance companies, traditional reinsurance is a better hedge.
Investors bet on Catastrophe Bonds
The article portrays the growing trend and



Cited: Azam A. (January 6, 2011). Investors bet on Catastrophe Bonds. The New York Times. Retrieved from http://dealbook.nytimes.com/2011/01/06/looking-to-diversify-investors-bet-on-catastrophe-bonds/ Keogh B., Suess O., Westbrook J. (April 21, 2011). The trouble with Catastrophe Bonds. Bloomberg Businessweek. Retrieved from http://www.businessweek.com/magazine/content/11_18/b4226055260651.htm

You May Also Find These Documents Helpful

  • Good Essays

    It extends from life cover policies to property policies and has significantly changed in the last five years since people want to ensure their personal properties, business properties and their lives too (Jelinek). Consequently, the performance of different insurance companies have changed widely depending on the applied techniques. Allstate Company has focused substantially on providing covers on life and homeowners, most of the people will continue insuring their lives and housesregardless of the economic depression status. On the other hand, State Farm focuses on providing cover to autos, motorbikes, and ships. Therefore, when the economic condition is poor, many people will opt to cover their lives and homes but not cars or even ship. The two insurance companies were equally affected by the stock market crash in 2008. However, they recovered very differently from the crash; by the end of 2009, roughly a year after the crash Allstate Company had recovered all it had lost. Contrastingly, State Farm had not recovered its loss until late…

    • 802 Words
    • 4 Pages
    Good Essays
  • Better Essays

    Exam 3 Study Guide

    • 2401 Words
    • 11 Pages

    The Swiss firm Winterthur once issued a bond whose payments will be cut if a severe hailstorm in Switzerland results in extensive payouts on Winterthur policies. These bonds are a way to transfer “catastrophe risk” from insurance companies to the capital markets. Investors in these bonds receive compensation in the form of higher coupon rates for taking on the risk. But in the event of a catastrophe, the bondholders will lose all or part of their investments.…

    • 2401 Words
    • 11 Pages
    Better Essays
  • Powerful Essays

    Deciding appropriate levels of disaster Insurance includes a correlation of present and future family cost levels with expected surviving companion's profit in addition to survivor benefits. Different assets are additionally considered, for example, fluid resources, speculations, benefits, and retirement accounts.…

    • 1464 Words
    • 6 Pages
    Powerful Essays
  • Better Essays

    Insurance and Lloyd

    • 2270 Words
    • 10 Pages

    Firstly, throughout the history, Lloyd’s has often been the first to insure world’s largest, new, unusual, most individual and complex risks, when many others were unwilling to do so. Lloyd’s specializes in risks that hard to price, large or otherwise difficult to quantify and understand. From oil rigs and bridges to celebrity body parts, from airlines and sporting events to global banks, millions of…

    • 2270 Words
    • 10 Pages
    Better Essays
  • Good Essays

    Legal Reserve System

    • 1341 Words
    • 6 Pages

    The economic challenges that we face in today's world have become second only to the great depression. The recent collapses of banks and large corporations in our country have made people scramble for a place that has security. We are asked often, "Where can we place assets that provide safety and security in uncertain times"? One place that should be considered is life insurance companies that have a Legal Reserve classification. Life companies that comply with the legal reserve requirements established by the state insurance laws are known as Legal Reserve Life Insurance Companies. Legal Reserve companies had their strongest showing of strength during the Great Depression of 1929-38 when some 9,000 banks suspended operations while 99% of all life insurance in force continued unaffected. Many people are not aware that it was not the government that bailed out the banking industry during the Great Depression; it was the U.S. insurance companies. In a financial collapse, the insurance companies would be second only to the U.S. government to fold. This is true because the government has taxing power, and can print money. Reinsurance, acquisitions, and mergers protected virtually all policy owners in the affected companies against personal loss. While thousands of banks closed across the United States, the insurance companies remained in force and continue to this very day. While there is no way of determining the total amount of capitalization of all of these combined legal reserve companies; I would venture to say that no other sector of the economy even comes close. Some of the companies that we recommend to our clients are hundreds of years old with billions of dollars in assets. Unlike any other enterprise where size is a major measure of financial stability, the legal reserve life insurance company's unique series of safeguards can make even the smallest company a tower of strength. In 1949 Mr. Leroy A. Lincoln, then…

    • 1341 Words
    • 6 Pages
    Good Essays
  • Better Essays

    In 1991, major discrepancies in the prices of multiple long maturity US Treasury bonds seemed to appear in the market. An employee of the firm Mercer and Associates, Samantha Thompson, thought of a way to exploit this opportunity in order to take advantage of a positive pricing difference by substituting superior bonds for existing holdings. Thompson created two synthetic bonds that imitated the cash flows of the 8¼ May 00-05 bond; one for if the bond had been called at the year 2000, and one for if it hadn’t been called and was held to its maturity at year 2005.…

    • 1423 Words
    • 4 Pages
    Better Essays
  • Powerful Essays

    The Dodd-Frank Effect

    • 1880 Words
    • 8 Pages

    Executive Summary The financial crisis of 2008 was cause by many factors within the United States financial system. Although the actions of insurance companies were not a key factor, they did adversely affect the industry and amplified the downward affect on financial markets. Insurance companies were adversely affected through the devaluation of their investments as a result of the collapsing mortgage market, depletion of capital, and increases in credit default swaps. Some insurance companies improperly managed risk and experienced issues with liquidity as claims and collateral calls were made and subsequent credit rating downgrades ensued. The US government attempted to fix these issues and prevent further failures by creating various federal oversight entities under the Dodd-Frank Act. Dodd-Frank also classifies many insurance companies as Nonbank Financial Companies, which are subject to more stringent regulations. Dodd-Frank takes into account the importance of the insurance industry and adequately made regulatory changes. The solutions to the issues in the Dodd-Frank act should be beneficial in preventing future failures. Problems in the Insurance Industry The financial crisis in 2008 was not largely caused by the actions of insurance companies, but did adversely affect the insurance industry and in certain cases exacerbated the pressures on financial markets. The insurance industry remained relatively stable overall through the crisis even though some insurance firms saw significant losses and required government assistance. The issues were, for the most part, seen in mortgage insurers, life insurers, financial guarantee insurers, and large insurance dominated financial groups. Mortgage insurers were most rapidly hit by the crisis due to mortgage credit risk exposure in the collapsing US mortgage market. The core business model for mortgage insurers is to guarantee financial service companies that their…

    • 1880 Words
    • 8 Pages
    Powerful Essays
  • Better Essays

    In the documentary “Business of Disaster” ,Rick Young, the producer, and Laura Sullivan explored and shed light on how many insurance firms can profit off of disasters and the systems set in place for them to do so. The purpose of the film was to discover how and why insurance companies are able to make a good profit out of a disaster, while taking a stance against the insurance firms. The documentary focuses on the aftermath of Hurricane Sandy in Long Island, New York, where they depict how there hasn't been much progress into rebuilding. The victims of Hurricane Sandy, such as Doug Quinn, Nick and Diane Camerada, where despite have the maximum claim for flood insurance, like in Doug’s case, nothing was done and when there was an attempt the insurance companies dismissed it as a pre-existing condition; an example being the water damaging the…

    • 1519 Words
    • 7 Pages
    Better Essays
  • Good Essays

    The first immediate impact of the AIG bankruptcy will be its investors. Although AIG is widely regarded as world’s No. 1 insurance corporation, many had not realized that AIG is also the world’s largest credit insurer for many major corporations as well as the largest issuers on credit related derivative products such as Credit Default Swap or CDS. During…

    • 905 Words
    • 4 Pages
    Good Essays
  • Better Essays

    Dunkin Donuts

    • 2362 Words
    • 10 Pages

    The Wall Street Journal, (October 11, 2012). Market Data Center. Retrieved from the internet from http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3010.…

    • 2362 Words
    • 10 Pages
    Better Essays
  • Good Essays

    Answer: Property and casualty insurance protects property (houses, cars, boats, and so on) against losses due to accidents, fire, disasters, and other calamities. Property and casualty policies tend to be short-term contracts and, that’s why the subject to frequent renewal is, and one more characteristic feature is the absence of savings component. Property and casualty premiums are based on the probability of sustaining the loss. To estimate the key determinant of the price of an insurance policy, i.e. risks, insurance companies take third-party proceedings that develop models of catastrophe loss probabilities. Based on the numbers form Exhibit 5 of the case we see that according to AIR Worldwide which provides information on the loss probability that Insured Loss if the listed Hurricanes Recurred in 2006 is 151.2% more than the case writer estimates of Actual Reported Damage in 2006. As you see from the table below differences in monetary terms and percentage change between these two different sources are huge except those figures with minus sign. So, we can say that prices are not fixed and depend on the third-party vendors’ probability calculations which are much higher than actual estimates suggested by casewiters. Consequently, the profits of property and casualty insurance companies can be high.…

    • 1666 Words
    • 7 Pages
    Good Essays
  • Good Essays

    Super Storm Sandy

    • 876 Words
    • 4 Pages

    Cited: "Catastrophe Risk Models, Software & Consulting." Catastrophe Risk Models, Software and Consulting. N.p., n.d. Web. 23 Nov. 2012. <http://www.eqecat.com/>.…

    • 876 Words
    • 4 Pages
    Good Essays
  • Better Essays

    Williams Co. Case Study

    • 1045 Words
    • 5 Pages

    The cost of financial distress is mainly reflected by the increasing yield to maturity (YTM) on bonds with lower ratings. To compensate bond investors the increasing amount of default risk, companies have to pay a…

    • 1045 Words
    • 5 Pages
    Better Essays
  • Better Essays

    National Flood Insurance

    • 1715 Words
    • 7 Pages

    Over 5 million people spread across 20,200 communities hold a flood insurance plan. In the year 2005 the National Flood Insurance Plan (NFIP) had paid out close to 16 billion. The premiums paid by the 5 million have only surmounted to 2 billion, therefore the NFIP has the ability to reach out to the US Treasury. With the US Treasury enabling the NFIP to meet its financial obligations, the financial obligations are becoming the obligation of the taxpayers (GAO, 2005) (Wells, 2005). The goals of the NFIP are “to provide property flood insurance coverage for a high proportion of property owners who would benefit from such coverage, through this insurance coverage reducing taxpayer funded disaster assistance when flooding strikes and reducing flood damage through flood plain management and the enforcement of building standards (such as elevating structures)” (GAO, 2005).…

    • 1715 Words
    • 7 Pages
    Better Essays
  • Powerful Essays

    Hdfc Life Insurance

    • 4276 Words
    • 18 Pages

    HDFC Life, one of India's leading private life insurance companies, offers a range of individual and group insurance solutions. It is a joint venture between Housing Development Finance Corporation Limited (HDFC), India's leading housing finance institution and Standard Life plc, the leading provider of financial services in the United Kingdom.…

    • 4276 Words
    • 18 Pages
    Powerful Essays