Catastrophe bond

A catastrophe bond (English catastrophe bond , short- cat bond , and act of god bond ) is a bond whose payment obligations are taken from the occurrence of certain catastrophic events dependent. Such a bond is the issuer - usually an insurance company the first or reinsurance - reduce the risk of financial loss from natural disasters ( English perils to transfer) on the capital market.

Besides insurers also some particularly affected by natural disasters in the past, industrial companies ( railway companies in Japan , energy provider in France ) issued catastrophe bonds to be borrowing to procure.

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A common practice is for the investor to contribute their capital to a special purpose vehicle by subscribing for shares . Unless a previously defined natural disaster occurs, he will receive the promised interest as compensation during the term of the bond and his capital back at the end of the term. Compensation for the assumption of risk is priced into the amount of the interest coupons.

In the event that the defined natural catastrophe occurs, the issuer's obligation to pay interest and repayments is either postponed or canceled. In this way, the issuer receives compensation for the damage caused by the natural disaster. One such event was the severe Tōhoku earthquake in Japan in 2011 .

In contrast to standard bonds, the interest and repayment of the bond depends not only on the creditworthiness of the debtor, but also on the occurrence of a defined natural catastrophe event. In the case of catastrophe bonds, a total loss for the creditor is possible depending on the occurrence of the catastrophe event. If a rating agency also takes the disaster risk into account in its credit rating in addition to the issuer risk, a catastrophe bond generally receives a credit rating in the speculative range (English non-investment grade ). By adding catastrophe bonds to their portfolio, the investor can achieve better risk diversification, since the catastrophe risk is hardly correlated with the usual market risks. According to the theory of CAPM , the portfolio is optimized in this way.

The advantage for the issuer lies in the fact that the catastrophe risk is passed on to the capital market, which in certain circumstances can be cheaper than traditional hedging of such risks through insurance or reinsurance (core business).

Design options

Cat bonds can be structured differently. A distinction is made primarily on the basis of the initiating event (“trigger”). The trigger triggers - partially or completely - the forfeiture of the creditor's interest and repayment claims; the issuer can dispose of the funds. A wide range of triggering events is used in the catastrophe bond market. These include index triggers, purely parametric triggers, parametric index triggers, modeled damage triggers and original damage triggers ( indemnity trigger ). The first catastrophe bonds issued in the late 1990s primarily used the original loss trigger (also known as the compensation-related trigger), but over time, other triggers were increasingly agreed.

Market development

Catastrophe bonds have been listed on the capital market since around 1994. They are primarily traded over the counter . The market has enjoyed increasing popularity since its inception and has been growing continuously since 1997. In 2007, a new record was set with the issuance of $ 8.24 billion in catastrophe bonds. 2013 was the second year in a row, the second-highest value after the record of 2007, with the issuance of 7.42 billion US dollars in 31 transactions. A record high was also reached in 2013 for average transaction size, at $ 341 million per transaction.

In the 1990s there were attempts to trade standardized catastrophe derivatives on the stock exchanges. However, due to lack of interest, trading was stopped.