Catastrophe Bonds

Catastrophe Bonds (or cat bonds) are essentially a bet against natural disaster - insurance companies issue the bonds and investors get paid their interest in the event of natural disasters such as earthquakes not happening. According to the Financial Times, "catastrophe bonds are typically issued for three years and, if no disaster occurs in that period, bond investors receive a good payout; otherwise, they have to pay out themselves."Do the investors such as pension funds and insurance companies truly understand the risks that they are taking with (our) money? Duncan Weldon investigates in this BBC Newsnight report. Ultra low interest rates in advanced economies appear to have encourage pension funds to search for riskier assets (a search for yield) to improve their return on their assets. A major natural disaster could trigger huge losses for those who have piled huge sums of money into them.

More here from Gillian Tett of the FT

Is catastrophe boom worrying?