CAT bond

Topics: Reinsurance, Insurance, Catastrophe bond Pages: 3 (757 words) Published: June 2, 2014
3 The traditional means of protecting against catastrophic events is through insurance and reinsurance arrangements. Discuss the main advantages and disadvantages of CAT bonds compared to (re)insurance from the perspective of the party seeking protection. The first main advantage of CAT bond compared to reinsurance, in terms of the party seeking protection, the Sponsor,Munich Re in our case, is that CAT bond ,which is Queen Street II Captial Ltd in our case ,allows the Munich Re to transfer the catastrophe risks (North Atlantic U.S.hurricane and European windstorms) to the CAT bond investors via SPRV, Queen Street II Capital Ltd in our case. Specifically, in a traditional reinsurance.........In addition, Catastrophe bonds have less credit risks due to the full collateralization of risk exposure offered by Cat bonds as a result from that the reserved funds for principal payment are placed in special trusts. (Niehaus 2002) .By contrast, some insurance and reinsurance agreements including a maximum exposure limit on the loss recompense may result in a insolvency risk of insurers. The second key advantage of Cat bond is that the issuer, Queen Street II Capital our case ,can save more costs via issuing Queen Street II CAT bond than purchasing reinsurance whose reinsurance premiums for catastrophe coverage are highly dependent of the actuarial loss estimates (Lane and Mahul 2008). Meanwhile, since the cat bond principals are fully collateralization, the issuer, Queen Street II Capital Ltd.,is able to predict the cost owing to the liquidity benefit provided. Further, Queen Street II Capital Ltd CAT bonds tend to moderate the reinsurance prices and ensuring that such prices do not increase further than what is stated. Thus, reinsurers are more competitive in terms of pricing because of the CAT bonds development. Investing in Queen Street II Capital Ltd CAT bonds is a good alternative since they have little or no correlation with other assets that are traded...

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Niehaus, G, 2002. The allocation of catastrophe risk. Journal of Banking & Finance 26, 585 596.
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