Title: Financing catastrophe risk in the capital markets

Authors: Isabel Martinez Torre-Enciso, John E. Laye

Addresses: Business and Economic Department, Universidad San Pablo, CEU/R.C.U. Escorial Ma-Cristina, C/Julian, Romea 23, 28003, Madrid, Spain. Certificate Program, Continuing Education in Business and Management, University of California at Berkeley, Contingency, Management Consultants, 346 Rheem Blvd., STE 202, Moraga, CA 94556 USA

Abstract: This article provides an overview of how insurance and reinsurance companies and institutions can use new methods to finance extraordinary or catastrophe risk in the capital markets as well as to split or swap it. These new methods are divided into two groups those that issue new assets (secondary financial assets) by securitisation and those that use derivatives structured products. Catastrophe or ||act of God|| bonds, contingent surplus notes, exchange-traded catastrophe options, catastrophe equity puts or catastrophe swap are useful instruments for insurers and for investors. From the insurers| point of view, those financial instruments are not used to replace traditional reinsurance, but to supplement it. From the investors| perspective, these forms of securitisation permit that investors use catastrophe models and exposure data to determine the rates of return they could expect from selling catastrophe options to insurers and also offer investors a new means of reducing portfolio risk through diversification.

Keywords: risk and emergency management; insurance market; financial markets; financial engineering and catastrophe bonds.

DOI: 10.1504/IJEM.2001.000510

International Journal of Emergency Management, 2001 Vol.1 No.1, pp.61-69

Published online: 18 Jul 2003 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article