In April, new outbreaks of the much-feared hemorrhagic fever Ebola shook the world again. The last major outbreak in West Africa 2014-2016 caused more than 11,000 deaths, and dealt a devastating blow to the long-term economies of several countries in the region. The effects were largely due to slow and insufficient response by the world community. However, this time, it appears that the lessons learned have provided for a much faster response, based on insurance principles and backed by cat bonds, rather than reliance on foreign aid. Read more.
Both cat bonds and corporate bonds are fixed income instruments so it is relevant to compare the risk premium of cat bonds with similarly rated traditional corporate bonds. Currently, cat bonds pay a higher risk premium compared to similarly rated corporate bonds. Read more.
The flooding from Hurricane Harvey was barely over when the world was alerted about Hurricane Irma. How could it be that the USA, after twelve years’ absence from major hurricanes, felt the impact of two record-breaking hurricanes over the course of one week? Read more.
While investors are attracted to the uncorrelated returns of cat bonds, the purpose of issuers is to obtain insurance coverage against low frequency and high severity catastrophes. Consequently, we will eventually face an event large enough to cause extensive losses in the re/insurance industry and the cat bond market. However, an event, such as a hurricane category 4 or 5 making landfall in Southern Florida, also tends to increase future returns for investors, as the insurance industry need to attract new risk capital. Read more.
“In order to cope with the climate change threat, we must not only decrease emissions of greenhouse gases. We must also be able to manage severe consequences of climate change. Hence, we should, to a considerably greater extent, leverage the resources provided by capital markets,” argues Entropics’ chief meteorologist Martin Hedberg and former minister for financial markets Peter Norman in a debate article. Read more.
How can we provide for improved insurance protection in developing economies? Parametric cat bonds and index based insurance offer possibilities. Sometimes critics argue that this entails a lack of correlation between damages and payments. But is this necessarily a disadvantage? Read more.
A traditional investment portfolio complemented with cat bonds would be expected to deliver more stable returns. Looking at the past ten years, a traditional portfolio, allocated to Swedish and foreign equity and bonds, would have delivered higher returns and a lower volatility with a cat bond allocation. Read more.
One of the largest advantages of cat bonds is that they are fundamentally uncorrelated to other asset classes. A financial crisis does not trigger earthquakes. A deeper analysis also shows that large natural events do not affect broader markets, though they naturally have a large local impact. Read more.
Improved standardisation regarding risk reporting can consolidate cat bonds as an asset class. Even waiting for a comprehensive standard, the industry could take several steps to increase the transparency of risk assessment. Read more.
For fixed income instruments, such as cat bonds, the sensitivity to interest rate variation is very important to investors. Any investment in fixed-income instruments, such as traditional government or corporate bonds, or cat bonds, carries an interest rate risk. Cat bonds are, however, structured in a manner that minimises this risk. Read more.
Cat bonds have in the past 20 years had a total return on par with the equity markets. The total cat bond sphere, as measured by the commonly used index Swiss Re Cat Bond Total Return, has historically returned 8.7% per annum on average in the past decade This gives a total return of 130.7% in ten years, slightly above the total return on the stock markets in the same period. The return is highly due to the uncorrelated nature of cat bonds, which have left them largely unaffected by a number of drawdowns, most notably the financial crisis in 2007-2009, affecting most traditional asset classes. Read more.
Climate change is set to increase the frequency of extreme weather events. Yet, we may paradoxically see fewer hurricanes with large impacts, due to the effects of urbanization. For insurance this poses a great challenge, where cat bonds may be part of the solution. Follow our animation explaining the hurricane paradox. Read more.
Britain's leaving the EU will have a large impact on financial markets. Even ILS and cat bonds will be affected. The asset class has, however, demonstrated its fundamentally uncorrelated nature during the turmoil on the equity markets after the referendum to the benefit of its investors when traditional portfolios have been negatively affected. Read more.
The Swedish newsletter Hållbart Kapital (Sustainable Capital) has published a piece on Entropics and cat bonds from a sustainability perspective. In the interview, I discuss the benefits to society from cat bonds, how we approach ESG issues and why the African Union fancies cat bonds. Read below for a full translation of the article. Read more.
Today, I write in an op-ed published at the Swedish financial news site Realtid, that many investors lack the responsible approach to alternative investments as they have to equity. If managers are to change, investors must make demands. Read more.
Cat bond investment management is somewhat different from the management of other asset classes as it is slow frequency trading and much more portfolio risk management. Entropics’ portfolio collects risk premiums by holding a globally diversified portfolio of natural catastrophe risk, with little or no correlation with traditional assets classes like equity and bonds. I am often asked by people I meet where cat bond management differs from traditional asset management, and I would like to use the opportunity to briefly explain some of the differences. Read more.
This day, March 11, marks the fifth anniversary of the Tōhoku earthquake, the worst post world war II disaster to strike Japan. The Tōhoku earthquake was one of the most severe earthquakes on record, with a magnitude of 9.0. The effects were breath-taking: Read more.