As Investors Seeking Higher Yields Eye New Catastrophe Bond Issues, What Are The Key Risks?

As Investors Seeking Higher Yields Eye New Catastrophe Bond Issues, What Are The Key Risks?

More and more institutional investors around the world are turning to the reinsurance markets for higher returns for their portfolios. The result could be record issuance in 2013 for catastrophe bonds (CAT bonds)–high-yield debt issued by insurers in which principal, rather than being repaid at maturity, may instead offset insured losses when defined catastrophic events occur. At the same time, insurers are looking to increase their own protection in the face of increasingly severe natural-disaster claims from windstorms, earthquakes, hurricanes, and other natural disasters. The severity or frequency of such events may be increasing, and disasters that hit heavily populated areas can be prone to unexpectedly high insured losses. Even with the best predictive models, however, any given year can present reinsurers with surprises

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