February 19, 2024

In 1992, the USA were hit by a major hurricane (named "Hurricane Andrew"), causing an enormous 27 bln. USD in damage to the economy. Of this amount, 15,5 bln. USD was borne by insurers. At that time, it was considered the largest insured loss in the history of the insurance industry and caused the bankruptcy of 8 American insurance companies.

In order to cover such catastrophic risks, the US government established a special program to provide coverage for natural catastrophe risks, American insurers began purchasing reinsurance capacities from the global reinsurance market in huge volumes. In addition, insurance companies, with the help of investment banks, began issuing catastrophe bonds (or CAT bond).

This debt instrument was issued for a relatively short term (3 to 5 years) and offered investors to receive higher income (or coupon payments). However, in case of realization of certain events prescribed in advance in the contract (such as tornado, hurricane, earthquake, etc.), the insurer is partially or fully released from repayment of the principal, as well as coupon payments.

Today, such bonds are actively used not only among insurers, but also by a large number of governments that are exposed to the risk of natural disasters. In 2006, Mexico became the first country to issue a catastrophe bond.

In 2023, catastrophe bond issuance reached a new record of 15 bln. USD, up by 8% from 2022. Global cat bond capacity has grown at about 4% annually for the past six years, roughly in line with the growth of global natural catastrophe exposures.