Reserch Disaster Bonds (also known as CAT bonds or catastrophe bonds) Research Paper

Reserch Disaster Bonds (also known as CAT bonds or catastrophe bonds) - Research Paper Example lves risk taking; investors acquire disaster bonds for a principal and then enjoy the high rate interest accumulation as long as the disaster does not occur. According to leading experts in risk management, â€Å"Catastrophe bonds are fixed income securities, typically issues by insurance companies, which pay an attractive yield to investors, but with a provision that should a specific predetermined event†¦..occur, bondholders suffer the loss of their income and potentially all their capital† (197). Events may be due to natural damage or human induced disasters where the bond may cover either the whole or part of the damage preventing the buyer from reaching to unbalanced sheet. The risk is conveyed to the investors rather than the insurers. The structure of CAT bonds is expressed in CAT bonds demystified (See fig. 1). These bonds are now used widely as they may forego interest and principle either in part or whole as stated in the condition. They require investors’ specialized knowledge and skills in judgment of where to invest. However, the jurisdiction of application affects the disaster bonds effect on parties involved. In the above structure, SPV or SPE are the established entities that insurance companies forward the reinsurance agreement to, which then relay’s the default provisions, as reflected in the agreement as a note; if the terms are approved, transactions are managed to generate money market returns where the SPV or SPE transfer back the principal and accumulated interests in cases of minimal risk involved (â€Å"CAT Bonds Demystified,† Rsm). The disaster bonds act like financial instruments; they were first issued in mid 1990s and most specific in 1997 in American history. American continent has had numerous attacks, U.S blizzard and tornadoes in 1993, Northridge earthquake in 1994 and especially the numerous hurricanes in Mexico, U.S, Caribbean, and Bahamas among others. Japan has also had its difficulty during the 1995 Hanshin earthquake