June 1, 2006
Dan OzizmirHow does a catastrophe or "cat" bond work?Cat bonds transfer insurance risk to capital markets investors. A sponsor transfers the risk to a bankruptcy-remote special-purpose vehicle that issues notes to investors. The primary driver of pricing for cat bonds is the modeled loss probability. Other market factors include peril, trigger type and term. Cat bonds pay out when an event occurs that meets the predefined loss trigger criteria.
What benefits does a cat bond provide an issuer such as Mexico?The goal of the government of Mexico is to receive insurance cover to be used for immediate emergency relief for the general population following large earthquakes. To this end
Dan Ozizmir, managing director in Swiss Re's capital markets unit, explains how the reinsurer structured a $160 million catastrophe bond for Mexico.