Do Cat Bonds feature risks comparable to those of subprimes?

Hurricane Katrina, Louisiana, United States

These three academic scholars compared the construction of these products to that of subprimes which were at the origin of the global financial crisis of 2007/2008. Cat Bonds enable insurers and reinsurers to get covered against natural catastrophes by transferring risk to investors through securitization.

The use of alternative capital solutions in the coverage of natural events is constantly growing. According to Aon, their amount is estimated at 63.8 billion USD in 2014. But climate change has increased the probability of occurrence of large-scale claims.

The controversy resulting from the publication of this research was criticized by insurance business experts who rejected the idea of ​​systemic risk since the holder of a Cat Bond cannot be exposed beyond the amount invested.
Moreover, these products are not suitable for all investors. Only a small part of them is interested in the detention of those products.