This news story about new catastrophe bonds being issued caught my eye. Catastrophe or cat bonds are sold to private investors, who get a given return on their investment if the bonded event, a hurricane, for example, does not happen. If the event does happen, the bond pays out and they lose all their investment. On the other hand, this report last year from economists with the RAND Corporation and the Federal Reserve Bank of New York suggests that cat bonds have yet to live up to their promise. Originally, it was thought they would catch on more because they would overcome inefficiencies in reinsurance markets. But perhaps they don’t. As the economists say:
Indeed, catastrophe bond issuance to date has been underwhelming, even in the aftermath of events that were expected to “push” issuance. While it is far too early to write an epitaph for the catastrophe bond, the experience to date does raise questions about its theoretical foundations and its likely future role.
Read the report. As far as stuff that is heavy with economic jargon and math goes, it’s a real page turner, relatively speaking.