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Structuring Catastrophe Bonds: A Functionalist Perspective

In: Global Perspectives on Insurance Today

Author

Listed:
  • John Schwolsky
  • Matthew Stern

Abstract

Developed in the mid-1990s as a way to tap additional retrocessional capacity, catastrophe bonds combine aspects of both the reinsurance and capital markets.1 While this dual nature often gives rise to advantageous pricing opportunities for companies looking to reduce their property and casualty (P&C) risk, it also presents several structural challenges resulting from the different, and sometimes incongruous, manner in which the reinsurance and capital markets operate. In particular, the counterparty relationship for securities offerings is fundamentally more diffuse and passive than traditional reinsurance. Consequently, catastrophe bonds are more susceptible to collective action problems, such as inherent difficulties policing loss development and monitoring collateral stability. In addition, capital markets transactions typically require a greater degree of loss transparency and standardization in order to enhance liquidity, something that is generally not a concern for traditional reinsurance.2

Suggested Citation

  • John Schwolsky & Matthew Stern, 2010. "Structuring Catastrophe Bonds: A Functionalist Perspective," Palgrave Macmillan Books, in: Cecelia Kempler & Michel Flamée & Charles Yang & Paul Windels (ed.), Global Perspectives on Insurance Today, chapter 0, pages 245-260, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-11737-2_19
    DOI: 10.1057/9780230117372_19
    as

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