Reed Smith's Claude Brown: The case for catastrophe bonds

Risk diversification

Among the increase in both the number and severity of natural calamities, it is easy to understand why those exposed would explore ways of diversifying risk.

After all, insurance and reinsurance can only absorb so much risk and their capacity is both cyclical and correlated. It is difficult to find diversification and natural hedges in catastrophic events. It is in precisely this environment that catastrophe bonds have flourished, offering a new source of risk absorption outside of traditional markets. And yet, even amidst the reports of catastrophe bond growth, one key question remains. If natural catastrophes are increasing in their frequency and impact, who is buying the increasing issuance and why? Retail investors return to markets...