Hurricane Irma is likely to be the most damaging not only in terms of US population in risk but also of economic impact. Catastrophe bonds will be very useful as they usually “mitigate the risk of natural disasters by taking on losses that otherwise would be borne by primary insurers,” as stated by Julius Baer’s analysts. And they add:
With almost half the ca. USD90bn cat-bond market tied to risks in Florida, proper diversification is crucial in light of a risk event such as Hurricane Irma. Such natural disasters could cause a temporary loss of 25% in value to a typical cat bond portfolio.
However, if an investor is willing to stay with the investment, even with no further injection of money, a well-run cat bond portfolio is expected to recover such a loss within two to three years due to the increase in catastrophe re/insurance premiums resulting from such an event. As they are fully collateralised with cash and the risks are primarily event-driven, the instruments have similar characteristics to high-yield debt, but are not correlated to the broader market. Finally, experts concludes:
Cat bonds are not risk-free investments, but they allow investors to earn a fair return against risks that are quantifiable and unaffected by volatile global market conditions in a low-yield environment. Market observers expect premiums to compensate for the added event risk in Florida, which offers an attractive yield for long-term investors.