LONDON (Reuters) – Investors who have put their money into specialist financial bonds which cover insurance companies from huge natural disasters are unlikely to be hit with big losses from monster storm Sandy even though it is one of the biggest ever to hit the United States.
So-called catastrophe bonds represent an obscure part of the insurance industry in which insurance and reinsurance companies transfer extreme risks, such as those for earthquakes and hurricanes, to financial market investors who receive a handsome yield in return for agreeing to cover damages they consider unlikely.
You would have thought a storm so big it's being called 'Frankenstorm' would cause cat bonds investors to worry about losing their money, but not so. Cat bonds are designed to cover natural catastrophes that are so big they only happen once every 250 years. Also, they need to hit specific locations at a specific intensity to trigger a payout.
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