Cat Bonds and Other Risk-Linked Securities: Product Design and Evolution of the Market

22 Pages Posted: 3 Feb 2012

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Date Written: January 3, 2012

Abstract

This paper analyzes risk-linked securities as sources of risk capital for the insurance and reinsurance industries. Risk-linked securities are innovative financing devices that enable insurance risk to be sold in capital markets, raising funds that insurers and reinsurers can use to pay claims arising from mega-catastrophes and other loss events. The most prominent type of risk-linked security is the catastrophic risk (CAT) bond, which is a fully collateralized instrument that pays off on the occurrence of a defined catastrophic event. The CAT bond market has expanded significantly in recent years and now seems to have reached critical mass. Nontraditional risk financing instruments, including CAT bonds, industry loss warranties (ILWs), and sidecars, now represent a substantial component of the property catastrophe retrocession market.

Keywords: Catastrophe bonds, risk-linked securities, reinsurance, sidecars, industry loss warranties, secutization

JEL Classification: G20, G21, G22

Suggested Citation

Cummins, J. David, Cat Bonds and Other Risk-Linked Securities: Product Design and Evolution of the Market (January 3, 2012). Available at SSRN: https://ssrn.com/abstract=1997467 or http://dx.doi.org/10.2139/ssrn.1997467

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

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