Comments on: The tiny cat-bond market http://blogs.reuters.com/felix-salmon/2011/04/25/the-tiny-cat-bond-market/ A slice of lime in the soda Thu, 23 May 2013 12:55:16 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: Besanson http://blogs.reuters.com/felix-salmon/2011/04/25/the-tiny-cat-bond-market/comment-page-1/#comment-26046 Besanson Tue, 26 Apr 2011 15:37:19 +0000 http://blogs.reuters.com/felix-salmon/?p=8017#comment-26046 Good Post! This is a good video on Cat Bonds http://vimeo.com/21122084 Good Post!
This is a good video on Cat Bonds
http://vimeo.com/21122084

]]> By: DavidMerkel http://blogs.reuters.com/felix-salmon/2011/04/25/the-tiny-cat-bond-market/comment-page-1/#comment-26031 DavidMerkel Mon, 25 Apr 2011 19:45:38 +0000 http://blogs.reuters.com/felix-salmon/?p=8017#comment-26031 I think the cat bond market will always be a bit player in the reinsurance business because it relies on several things to be true at the same time. 1) Inadequate reinsurance capacity to absorb a certain large risk or set of risks. 2) Few players in the industry loss warranty space will take on the risk at an acceptable price. 3) The risk is not easily parameterized -- which you pointed out. 4) There are enough junk bond players looking for diversification. These four aren't usually around at the same time, except after a major disaster, maybe. It is relatively easy to set up a reinsurer; capacity issues and pricing power are typically transient. That is my main reason why cat bonds will always be a niche market. Second, cat bonds usually can't leverage, and the reinsurer can leverage modestly, giving the reinsurer another advantage. I think the cat bond market will always be a bit player in the reinsurance business because it relies on several things to be true at the same time.

1) Inadequate reinsurance capacity to absorb a certain large risk or set of risks.

2) Few players in the industry loss warranty space will take on the risk at an acceptable price.

3) The risk is not easily parameterized — which you pointed out.

4) There are enough junk bond players looking for diversification.

These four aren’t usually around at the same time, except after a major disaster, maybe. It is relatively easy to set up a reinsurer; capacity issues and pricing power are typically transient. That is my main reason why cat bonds will always be a niche market. Second, cat bonds usually can’t leverage, and the reinsurer can leverage modestly, giving the reinsurer another advantage.

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