A reader of this publication, the president of an insurance agency, recently wrote to say he kept hearing about catastrophe bonds but had little knowledge of what they were. He was curious if these instruments would replace traditional reinsurance and was particularly concerned about a scenario that would result in the catastrophe bond market’s collapse, resulting in widespread financial problems for primary insurers and economic calamity.

Executive Summary

From their inception in the 1990s, insurance-linked securities (ILS) have now found a permanent foothold in the insurance and reinsurance market. The ILS market has demonstrated its staying power after last year's costly hurricane season, showing that the sector was able to take the hits, pay the claims and provide new capacity with undimmed enthusiasm.

His timing was excellent. Catastrophe bonds, also known as cat bonds and insurance-linked securities (ILS), passed an important threshold in 2017, successfully weathering Hurricanes Harvey, Irma and Maria, three of the five costliest hurricanes in U.S. history. Altogether the storms produced $217 billion in damage-related costs, of which $92 billion was insured, according to Swiss Re’s research publication “sigma.”

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