The report, "The Growing Appetite for Catastrophe Risk: The Catastrophe Bond Market at Year-End 2004," found outstanding risk capital reached $4.04 billion in 2004, a $59 million increase over 2003's $3.45 billion total. The figure represents a 41 percent increase over the $2.86 billion recorded in 2002.

The report is broken into two sections: an overview for those who are new to catastrophe bonds, and a detailed breakdown of transaction activity for 2004.

The report relates that catastrophe bonds were developed in the mid-1990s to transfer catastrophe insurance risk from insurers, reinsurers and corporations to investors.

The bonds' purpose is to protect the sponsors of the bonds from financial losses caused by large natural catastrophes by providing an alternative or supplement to traditional reinsurance. These target layers of risk have very low loss probabilities?less than one percent annually.

Investor demand is outstripping supply of bonds annually, according to the report, as new dedicated bond funds are being created throughout the year. The dedicated bond funds (those funds directed exclusively to risk) have more than $3 billion under management.

There also appears to be a growing number of private transactions, where the bonds are sold to one or only a few investors, but since these are not announced, the exact volume of activity cannot be precisely measured, Guy Carpenter said.

The year also saw the first bond issued by The Hartford under Foundation Re Ltd. It was a $247.5 million issue providing cover for first-event hurricanes in the Eastern Gulf Coast and subsequent-year coverage for U.S. hurricane or earthquake events.

It also reported that despite worldwide catastrophes, there were no reports of any outstanding bonds being triggered except for an $85 million "second event" layer called Phoenix Quake Wind II.

The complete report is available at www.guycarp.com under "White Papers" found under the Press Room icon or by contacting Guy Carpenter at [email protected].