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By: Besanson Tue, 26 Apr 2011 15:37:19 +0000 Good Post!
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By: DavidMerkel Mon, 25 Apr 2011 19:45:38 +0000 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.