The Risk Implications of Insurance Securitization: The Case of Catastrophe Bonds

44 Pages Posted: 15 Apr 2011 Last revised: 8 Jan 2014

See all articles by Bjoern Hagendorff

Bjoern Hagendorff

Independent

Jens Hagendorff

University of Edinburgh - Business School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Angelica Gonzalez

University of Edinburgh

Date Written: November 7, 2013

Abstract

Catastrophe (Cat) bonds are insurance securitization vehicles which are supposed to transfer catastrophe-related underwriting risk from issuers to capital markets. This paper addresses key, unanswered questions concerning Cat bonds and offers the following results. First, our findings show firms that issue Cat bonds exhibit less risky underwriting portfolios with less exposure to catastrophe risks and overall less need to hedge catastrophe risk. These results show that the access to the market for insurance securitization is easiest for firms with less risky portfolios. Second, firms that issue Cat bonds are found to experience a reduction in their default risk relative to non-issuing firms and our results, therefore, demonstrate that Cat bonds provide effective catastrophe hedging for issuing firms. Third, firms with less catastrophe exposure, increase their catastrophe exposure following an issue. Therefore, our paper cautions that the ability to hedge catastrophe risk causes some firms to seek additional catastrophe risk.

Keywords: Insurance securitization, Catastrophe bonds, Default risk

JEL Classification: G22, G32, G33

Suggested Citation

Hagendorff, Bjoern and Hagendorff, Jens and Keasey, Kevin and Gonzalez, Angelica, The Risk Implications of Insurance Securitization: The Case of Catastrophe Bonds (November 7, 2013). Available at SSRN: https://ssrn.com/abstract=1808940 or http://dx.doi.org/10.2139/ssrn.1808940

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Angelica Gonzalez

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
795
Abstract Views
2,969
rank
33,254
PlumX Metrics