Catastrophe bonds are a new type of insurance securitization and have become increasingly popular in the insurance industry throughout the 21st century. Unlike traditional reinsurance products, cat bonds are “fixed income instruments issued primarily by insurers and reinsurers as a way of passing on their exposure to potential large financial risks associated with natural catastrophes” (Ip). in the form of an insurance linked security. These securities are designed to protect insurers and reinsurers against “super” catastrophes, or events that are high severity, but low frequency of occurrence, defined as having around a 1% or 1 in 100 years probability. Cat bonds first emerged in the 1990s, after hurricane Andrew and the Northridge Earthquake in California wiped approximately USD 30 billion off balance sheets of insurers and reinsurers. Insurers and reinsurers noticed the industry’s vulnerability to such “super” catastrophes. “The potential cost of a disaster had outgrown the capacity of the insurance industry to protect against it” (Ip). Reinsurers had to increase equity levels in order to protect against a natural disaster which increased the price for catastrophe risk. Although catastrophe bonds have parameters which strictly limit the type and location of a disaster they cover, cat bonds have had a positive impact on the insurance industry because cat bonds add reinsurance capacity through the financial market, cat bonds influence the price of traditional reinsurance, and cat bonds enable regional insurance carriers to expand underwriting.
The insurance industry needed a vehicle to transfer billions of dollars of catastrophe risk to an entity capable enough to manage it. The only entity able to cope with these large risk...
... middle of paper ...
....insurancejournal.com/news/southeast/2013/05/23/293074.htm>.
Artemis. "Alternative Capital the Biggest Challenge for Traditional Reinsurers: Moody’s."Www.artemis.bm. Artemis, 5 Sept. 2013. Web. 09 Nov. 2013. .
Ip, Paula. "Catastrophe Bonds: The Birth of a New Asset Class." Theasset.com. The Asset, 28 May 2012. Web. 26 Oct. 2013. .
Keogh, Bryan. "The Trouble with Catastrophe Bonds." Www.businessweek.com. Bloomberg Businessweek Magazine, 21 Apr. 2011. Web. 27 Oct. 2013. .
Modu, Emmanuel. “Rating Natural Catastrophe Bonds.” 19 Jan. 2012. PDF File
RMS. “CAT Bonds Demystified.” https://support.rms.com/publications/Cat_Bonds_Demystified.pdf
The high yield bond is a bond that features higher returns but with a lower credit rating than typical investment-grade bonds. These bonds can also be referred to as ‘junk bonds’ that are rated as below investment grade by organizations such as Moody’s and Standard and Poor’s. [Appendix #1] Generally, companies that issue high yield bonds may receive their rating due to a few characteristics, such as being less established than typical household brands, showing weak financial performance or they may have suffered a financial setback at some point in their corporate history. Although, high yield bonds may seem to have a relatively negative reputation among investors they possess many attractive advantages which include: diversifying portfolios, greater yields, lower volatility thus makings for a good long-term investment and the fact that bondholders have priority of recovering their money over equity security holders in the case of bankruptcy. These bonds are accessible to investors either as individual issues or through the means of high-yield mutual fund investments. On the other hand, there are certainly risks involved when investing in high yield bonds, such as credit risk where there is the possibility that the issuer defaults on the principal or interest payments over the course of the term and investment in these bonds ultimately depends on how informed the investor is and the amount of risk the investor is willing to tolerate. Similar to other types of securities there is always the threat of economic downturn and risks occurring when investing in international markets, such as political and exchange rate risks. In contrast, high yield bonds are able to mitigate interest rate risks better, and are less vulnerable to drast...
4. A question as to the effect of the payments, at the treasury, of the bonds of Hardenberg and of the four bonds of Birch, Murray & Co.
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
Gene understands that the story does not end with just the damages but also what it contributes to the future. It has brought with it new measures in structural development, social relationships and insurance holding. It is a major step to the lessening of the impact of future disasters.
Catastrophes impact large areas, crossing regional and often, state jurisdictional boundaries, and will require m...
High yield bonds or "junk" bonds get their name form their characteristics. As credit ratings were developed, the credit agencies created a grading system to reflect the relative credit quality of bond issuers. The highest quality bonds are "AAA and the credit scale descends to "C", and finally to the "D" of default category. Bonds are considered to have and acceptable risk of default or investment grade and encompass "BBB" bonds and higher. Bonds "BB" and lower are called speculative grade and have a higher risk of default. Most investors were restricted to investment grade bonds, speculative bonds developed negative connotations and were not widely held investment portfolios. Mainstream investors and investment dealers did not deal in these bonds. They result in junk since few people would accept the risk o...
Hazards pose risk to everyone. Our acceptance of the risks associated with hazards dictates where and how we live. As humans, we accept a certain amount of risk when choosing to live our daily lives. From time to time, a hazard becomes an emergent situation. Tornadoes in the Midwest, hurricanes along the Gulf Coast or earthquakes in California are all hazards that residents in those regions accept and live with. This paper will examine one hazard that caused a disaster requiring a response from emergency management personnel. Specifically, the hazard more closely examined here is an earthquake. With the recent twenty year anniversary covered by many media outlets, the January 17, 1994, Northridge, California earthquake to date is the most expensive earthquake in American history.
So far in the American history, hurricane Katrina remains to be one of the most devastating hurricanes to have ever been witnessed. Though preparation were already in place to counter its effects, the storm’s impact turned out to be one of the most unprecedented ever seen. This is even notable from the way government agencies reacted to this disaster. It brought out the inefficiencies and inadequacies of the emergency units both at the federal and state level. This is because these governments’ response standards to this disaster were far much below the threshold expected. Government efforts could not match, and hence counter, the impacts of hurricane Katrina. This led to loss of massive property and people’s lives and property. Local and Federal governments face criticism up to date because the private sector seemed more prepared to counter effects of hurricane than the government.
Rousmaniere, Peter. “Facing a tough situation.” Risk & Insurance 17.7 (June 2006): 24-25. Expanded Academic ASAP. Web. 23 March 2011.
...easures pertaining to the micro stability of the intermediaries can be subdivided into two categories; general rules on the stability of all business enterprises and entrepreneurial activities, such as the legally required amount of capital, borrowing limits and integrity requirements; and more specific rules due to the special nature of financial intermediation, such as risk based capital ratios, limits to portfolio investments and the regulation of off-balance activities. [White 1996] References Z Bodie, A Kane and A J Marcus. "Investments". 5th Ed. Irwin 2000. E J Elton and M J Gruber. "Modern Portfolio Theory and Investment Analysis". John Wiley 5th Edition 1995. White L., 1996, "International Regulation of Securities Markets: Competition or Harmonization?” in Lo A. (ed), The Industrial organization and Regulation of the Securities Industry, NBER, Cambridge
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
Waugh, W. (2006). Shelter from the Storm: Repairing the National Emergency Management System after Hurricane Katrina. Michigan City: SAGE Publications.
Lindauer, J. (2011, November 24). Picking Winners When Greece Defaults. Seeking Alpha. Retrieved February 1, 2014 from http://seekingalpha.com/article/310107-picking-winners-when-greece-defaults
Havemann, Joel. "He Financial Crisis of 2008: Year In Review 2008." Encyclopedia Britannica Online. Encyclopedia Britannica, n.d. Web. 06 May 2014.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.