Catastrophe Bonds and Systemic Risk
38 Pages Posted: 20 Aug 2013 Last revised: 21 Aug 2013
Date Written: August 20, 2013
Do catastrophe bonds increase or decrease the exposure and contribution to systemic risk of the issuing insurance companies? And if such issues influence systemic stability, what design features of the bond and characteristics of the issuing insurer cause catastrophe bond issues to destabilize the financial sector? Contrary to current conjectures of insurance regulators, we find that the contribution of ceding insurers to systemic risk actually decreases significantly after the issue of a catastrophe bond. We empirically confirm that a higher pre-issue leverage, a higher firm valuation and previous cat bond issues all exert a decreasing effect on the issuer's systemic risk contribution.
Keywords: cat bonds, insurance industry, systemic risk
JEL Classification: G22, G01, G34
Suggested Citation: Suggested Citation