Catastrophe Risk Bonds

"Knowledge is power" —— the shine of this proverb becomes more brilliant in the era of information. However, not all the knowledge can be transformed into productivity, but only those with the spirit of innovation can greatly force the economic development forward and bring the fundamental change to our society. Fortunately, the international financial market is one of the most advanced realms with the sense of innovation.During the last decades, the booming of the financial innovative products, for example, assets management, fund management, investment portfolio, financial derivatives, assets securitization, and etc, sometimes even makes us dumfounded and amazed. Comparatively speaking, it seems that the insurance industry is overcautious and lack of the sense of creation and innovation with the selling of traditional non-changeable insurance products. Nevertheless, the tide of innovation in the knowledge-based economy has thoroughly broken the fences and walls of the insurance area, (re)insurers have to stand up and face the challenge, bring in the innovative products which can adapt to the demand and requirements of their clients. In the meantime, the deepening of world economic liberalization also fundamentally changes the framework and structure of international competition. Deregulation, Internet transparency and the impact of globalization are transforming the competitive landscape of financial services, which leads to the convergence of insurance and capital market. Property/casualty insurers must assess their companies' core competencies and operational capabilities to determine their ability to develop innovative products, service and delivery in the face of formidable competitors. Almost overnight, the list of competitors has widened to include banks securities firms, as well as new entrants such as Internet "attackers". These new competitors are not burdened with legacy systems or agency systems, have innovative ideas, strong management and a focus on execution.Strategic management in the 21st century will require all companies to constantly innovation——a difficult task for the historically staid property/casualty industry. Innovation requires changing——and sometimes destroying——outdated business models, often accessing external expertise through outsourcing, alliances, joint ventures, and through mergers and acquisitions.This paper focuses on the Catastrophe bonds, one of the innovative financial products combining the techniques of insurance and securities. The frequent outbreak and enormous loss-size of catastrophes, for example, windstorm, floods, earthquakes, volcano eruption, hurricanes, and etc, have greatly frightened the (re)insurers who are eager to find some alternatives to transfer the risks smoothly. It seems that the capital market can function best. Although CAT bonds are still at the start-point of development, inevitably with several limitations, the successfully-delivered CAT bonds during the last 36 months have greatly aroused the interests of the investors in the capital market, which also enhances the confident of the supporters in the insurance and capital markets.This paper focuses on the following four parts concerning the CAT bonds: the origin, the basic theory and framework of CAT bonds, the practical issuance and case analysis, the future prospects of CAT bonds and the insurance risk securitization. We hope that the introduction of CAT bonds in this paper can be of reference to the innovation activities for our insurance industry. The core idea behind the CAT bonds is the spirit of innovation, which is obviously reflected in its structure: the introduction and design of triggering mechanism, the establishment of objective default risk. Therefore, we pay more attention to the above issues, especially to the analysis and comparison of three different triggering mechanisms. After the comparison, we find the proper combination of the advantages of the three and forecast the future prospects of this innovative product.Finally, we stress the impo...