What are CAT bonds?
Most Insurance Linked Securities (ILS) are catastrophe bonds or CAT bonds, which are used as an alternative source of reinsurance. The majority of catastrophe reinsurance relates to the US market for weather events, which means it’s a risk that is tricky to diversify. Back in the 90s Hurricane Andrew and the Northridge earthquake resulted in a number of insurers folding, and reinsurers decided they wanted to limit their exposure. So they started sharing the risk by securitizing it.
In the past when Solidum issued Cat Bonds, they used Euroclear for settlement. Compared to stocks, Cat Bonds are relatively specialist, and to access Euroclear, a business needs to go via their banking relationship. This is in part because Cat Bonds are collateralized: investors deposit funds to cover the potential insurance risk. This bank-as-gatekeeper role creates a barrier to entry given the banks are keen to earn fees for their service.
Most Insurance Linked Securities (ILS) are catastrophe bonds or CAT bonds, which are used as an alternative source of reinsurance. The majority of catastrophe reinsurance relates to the US market for weather events, which means it’s a risk that is tricky to diversify. Back in the 90s Hurricane Andrew and the Northridge earthquake resulted in a number of insurers folding, and reinsurers decided they wanted to limit their exposure. So they started sharing the risk by securitizing it.
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