The Impact of the Financial Crisis and Natural Catastrophes on CAT Bonds

Abstract

This paper employs secondary market data to examine how natural catastrophes or financial crises affect CAT bond premiums. We find evidence that both the financial crisis and Hurricane Katrina significantly affected CAT bond premiums. The premium increase resulting from natural catastrophes can primarily be attributed to an increased coefficient of expected loss calculated by catastrophe modeling companies. Furthermore, our results indicate a positive relationship between corporate spreads and CAT bond premiums. Thus, CAT bonds should not be regarded as "zero-beta" securities. Moreover, our results indicate that deal complexity, ratings, and the reinsurance cycle are significant drivers of CAT bond premiums.

Keywords: CAT Bonds, Financial Crisis, Catastrophe Events, Risk Premium

JEL Classification: G01, G12, G22