The incidence of disasters on the planet is increasing. Insurance companies also demand the pension of private persons. When buying catastrophic bonds, you can pay thanks to a very interesting ratio of risk and return. D does he really go to disasters?
Katastrofick bonds (cat bonds) began to be issued by the bond and hedge companies in the first half of the 1990s after major catastrophes (such as Hurricane Andrew), when hedgers began to reduce the risk of insurance claims. In addition to the dramatic external reinsurance, they were looking for new opportunities to obtain liquidity and risk risk to other entities.
Cat bonds are most often mentioned in connection with the list of hurricanes in the Caribbean, which thus led to the emergence of catastrophic bonds. At present, however, these debt securities are at various events causing large codes both locally and globally.
In addition to cat bonds protecting bonds and hedges before hurricane codes, there are bonds available on the market for earthquakes (very common, for example in Japan), rafting, torso, strong winds (France). Last year, companies engaged in life insurance saw an idea to protect themselves by issuing a cat bond against the various effects of the five-lace pandemic.
In addition to the protection of connection companies, cat bonds are becoming such an interesting tool for investors, who see the interest in valued interest. The basic principle of cat bond is simple. In the event that the expected event does not occur, investors have a year in addition to investing money entry.
Cat bond yields are very high compared to white bonds and are often compared to real bonds (high-yield bonds issued by young or low-rise companies). They are interesting for investors also because the return is ordinary, not a simple sum of risk-free rates and premiums in the form of risk premiums (depending on the event, based on them).
When the event actually occurs, the investor loses the return and in some cases the entire nominal value of the investment. This depends on the codes issued by the disaster, and thus on the issuer and, in the absence of an indicator, on the basis of its composition, the investor’s return rate is determined. In addition to the codes caused to the issuer (insurance, reinsurance), bonds can be indexed to special indices published by independent institutions, or strictly physical indicators (for example, the Richter scale in the case of earthquakes).
At first glance, cat bonds appear to be a very effective tool for spreading risk over several entities, in this case capital markets and institutional investors. Due to its size, the capital market could be able to absorb some risks more than the insurance market itself. For both parties, they can have these cenn papry nkolik entrance.
The benefits for issuers were summarized by Christian Mumenthaler of Swiss Re, a world leader in the field of security. First of all, cat bondy help diversify a portfolio of risks from disasters. Secondly, credit risks are significantly reduced, because the funds necessary for insurance events are repaid. The long-term nature of these tools is so convenient. Last but not least, it can be read that the well-established methodology of construction of these bonds currently simplifies their issuance and payment.
For investors in the capital markets, perhaps the most suitable cat bond is practically zero correlation with other types of bonds and securities, which is very useful in diversifying and optimizing risk and return. Thus, the ratio of risk and return is very interesting for investors compared to other types of investment tools.
Nothing is free
Of course, there are risks on both sides that determine their birth. For the connecting company itself, this may be an interest on the part of the investor. This situation can occur if the probability of a catastrophe (for example, the autumn hurricane, etc.) is very high and investors do not want to risk the loss of invested funds. The issuer will then not be able to place the entire issue on the market, or they will have to sell the bonds at a discount. In this case, the funds obtained will not represent the required amount of pensions.
But the risks exist on the part of the investor. The risk of non-payment to the purchase (or the entire invested amount) is the most common and fundamentally necessary in the event that the event on which the bond is linked takes place. The risk may be borne by the issuer itself (the insurance company or the reinsurance company), which in the case of indexation to codes caused directly by the connection may affect the conditions of payment of the entry (manipulation of the code). For this reason, preference is given to bonds that are taken on independent and transparent indices.
As catastrophic bonds are still a relatively new investment tool, they are not born with us. However, similarly to other investment instruments, cat bonds can find their way to our market and to domestic investors in the future.