Premium
The Impact of the Financial Crisis and Natural Catastrophes on CAT Bonds
Author(s) -
Gürtler Marc,
Hibbeln Martin,
Winkelvos Christine
Publication year - 2016
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12057
Subject(s) - bond , reinsurance , financial crisis , bond market , financial system , economics , business , financial economics , monetary economics , finance , keynesian economics
This article employs secondary market data to examine how natural catastrophes or financial crises affect CAT bond premiums. We find evidence that both the financial crisis and Hurricane Katrina significantly affected CAT bond premiums. The premium increase resulting from natural catastrophes can primarily be attributed to an increased coefficient of expected loss calculated by catastrophe modeling companies. Furthermore, our results indicate a positive relationship between corporate spreads and CAT bond premiums. Thus, CAT bonds should not be regarded as “zero‐beta” securities. Moreover, our results indicate that deal complexity, ratings, and the reinsurance cycle are significant drivers of CAT bond premiums.