Catastrophe bonds investors shrug off impact of natural disaster
Catastrophe bonds are unlikely to be swayed by the impact of Hurricane Sandy, as investors show little concern for the storm’s impact on the U.S. and the global insurance industry. Though Hurricane Sandy is being considered one of the largest storms to ever impact the U.S., causing approximately $20 billion in damage according to early estimates, it may not be able to cause a panic amongst investors. Catastrophe bonds have yet to show any indication of negative impact from the storm, perhaps due to the resiliency that the insurance industry has built up through the past two years of frequent natural disasters.
Bonds represent risks posed by major catastrophic events
Catastrophe bonds represent a part of the insurance industry that rarely gets much attention. These bonds reflect the extreme risks that insurance and reinsurance companies share, most of which concerns earthquakes and hurricanes. These bonds are made available through international financial markets, where investors agree to take on the financial implications of these bonds in return for high returns.
Sandy being considered a once in 250 year event
Many catastrophe bonds are for events that are considered to happen only once every century or so, if not longer. In the case of Hurricane Sandy, a storm that is considered to be a once in 250 year event, investors in these bonds are likely to see serious financial losses. Despite the storm’s ferocity, it has been unable to have a negative effect on the catastrophe bonds sector, which is good news for the insurance industry, as it will likely not see a major shift in finances or risk.
Insurers warn that natural disasters may become more common
Even Hurricane Katrina, the worst hurricane that the U.S. has ever experienced, was unable to cause a shift in the catastrophe bonds sector. Typically, when major natural disasters occur, the demand for catastrophe bonds from insurance companies grows. This demand grows because investors are unlikely to face financial losses from such events within their lifetimes. Insurance companies, however, are warning that major natural disasters could begin to happen more frequently, exposing investors to the risk of major losses if they are not careful.
