Investors, turned off by the turmoil in the financial markets, are instead taking their chances and betting against natural disasters like earthquakes and hurricanes, The Washington Times reports. They are doing this by increasing investments in catastrophe, or “cat,” bonds.
Catastrophe bonds, Reuters explains, are used by the insurance industry to transfer extreme risks, such as those for earthquakes or hurricanes, to financial market investors, who receive a handsome yield in return for agreeing to cover damages they consider unlikely.
Most of the time, investors get good returns on their money, the Washington Times reports. Chances are slight that cat bonds will ever be redeemed by the issuer.
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The “triggers” on the bonds are so specific, covering things such as location, time and degree of destruction.
But there is a difference between slight risk and no risk.
Reuters says two bonds have been triggered in 2011.
The earthquake that struck Japan in March triggered a full payout of $300 million on the cat bond issued by Munich Re. Another issued by Mariah Re to cover severe thunderstorms was downgraded by S&P following a partial loss after tornadoes in the U.S. this past spring.
Still investors are increasingly taking the risks associated with cat bonds.
The Washington Times reports the market has jumped 2.8 percent since Hurricane Irene made landfall in late August.
“Investors are just generally nervous about everything that’s going on in the financial world. Right now, they think this is a safe haven. They don’t know where else to put their money,” said Judy Klugman, managing director and head of insurance-linked securities distribution at Swiss Re, a reinsurance company that issues catastrophe bonds told the Washington Times.
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