DO CATASTROPHE BONDS STRENGTHEN OR WEAKEN THE REINSURANCE MARKETPLACE

A limitation of insurers’ ability to underwrite risks was their limited capacity to absorb extremely large claims, mainly from natural catastrophes. Alternative ways of financing these huge risks were introduced in the 1990s by tapping into the capital markets, using bond instruments. These became known as catastrophe (cat) bonds. This paper describes their history and operation. Their strengths and weaknesses are then reviewed, followed by an assessment of their future. Finally, an answer is suggested to the question posed by the title of this paper.