This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Investing in Catastrophes

By Hal M. Bundrick

NEW YORK (MainStreet) The frequency and cost of natural catastrophes have increased over the last 30 years. In fact, 2011 was a record year for natural disasters with Asia Pacific accounting for two-thirds of total losses, including the Tohoku earthquake and tsunami, according to Munich Re. But recent flooding in Central Europe, Alberta and Colorado may surpass the flood losses of that catastrophic year.

The human toll of these horrific events is staggering and incalculable. But the financial impact, while insignificant in comparison, is measurable and mounting. Through the first half of this year alone, global economic losses have been estimated to top $45 billion. And financially, the gap between the expenses incurred and those insured is widening. The insurance industry covered $13 billion of the worldwide losses -- less than one third -- leaving a global disaster gap of $32 billion. Historic typhoon Haiyan will add to the massive insurance shortfall for 2013.

Insurance companies are seeking additional financial instruments to hedge the risk and are increasingly seeking that relief from the capital markets.

Catastrophe bonds, or cat bonds, are one such device. Issued to cover a particular risk in a specific region, such as a hurricane or earthquake, cat bonds can pay a generous coupon to investors if the event doesn't occur or default and pay nothing if it does.

"Insurers and the capital markets can help reduce the disaster gap by working together with big data to deploy new capital to cover new perils in new regions," says BNY Mellon's international head of insurance Paul Traynor. "This will reduce the cost of rebuilding for governments and provide a positive contribution to society."

He argues that the experience of the insurer has never been needed more; deploying capital against previously uncovered risks requires deep underwriting and technical expertise.

This expertise, as well as the comfort that comes from seeing insurers using their own capital, will encourage the capital markets to invest in more cat bonds," Traynor said.

BNY Mellon acts as a trustee, paying agent and collateral agent on cat bonds. It was trustee on 68% of all cat bonds in 2012.

The market for cat bonds is tiny but rapidly expanding. BNY Mellon estimates the current $19 billion market could more than double to $50 billion within five years, the fastest growth for the sector in six years.

"The initial investor base was dominated by hedge funds and private equity, but we are seeing more long-term investors such as pension funds buying cat bonds," says Dean Fletcher, head of EMEA corporate trust at BNY Mellon. "Investors are attracted by the high yields in the current low interest rate environment. Cat bonds also offer investors a chance to diversify their portfolios because of the low correlation of risk between catastrophic events and broader financial markets."

--Written by Hal M. Bundrick for MainStreet

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs