Catastrophe (CAT) bonds:

Abstract

Catastrophe bonds, a relatively new entry into the bond market, are a form of reinsurance in which insurance firms are able to offset the financial risks from both natural and man-made catastrophes. Although the primary offset is within the reinsurance market, starting in the 1990s insurance firms started using the financial markets to offset catastrophe risks. Anecdotal evidence shows that the entry of CAT bonds made the reinsurance market more efficient and allowed investors an opportunity to participate in what has been a very profitable investment opportunity. Our analysis shows that on average, CAT bonds have generated high returns but with the advantage of diversification when compared with similarly rated corporate debt. Thus, CAT bonds are a viable investment option withina diversified portfolio.