Cat bonds


Paul Scrivener takes a look at the catastrophe bonds industry and the role played by the Cayman Islands.


Cayman: leading the way No doubt it raised a few eyebrows in Bermuda when it was announced in July this year that


new figures revealed that the Cayman Islands had become the leading offshore jurisdiction for listed catastrophe bonds (cat bonds). Even Bermuda’s main newspaper, The Royal Gazette, was forced to acknowledge that Bermuda had a lot of catching up to do to match its offshore rival in the competition for cat bond business. The July figures showed that there were 74 cat bonds listed on the Cayman Islands Stock Exchange with a value of over $7.7 billion, whereas, in contrast, Bermuda’s own statistics showed 10 listed bonds having an aggregate value of $1.17 billion. For those involved in Cayman’s structured finance and captive insurance industries, there was much less surprise as the figures simply bore testimony to the jurisdiction’s continuing ability to adapt and embrace innovative financial products.


From lunacy to triumph In an article in QFinance published in January this year, Anthony Harrington describes cat


bonds in a particularly graphic way when he says: “Catastrophe bonds are either complete lunacy or an outstanding triumph of statistics and probability theory over common sense, depending on your point of view.” This comment speaks to two particular features of a cat bond—the high risk taken by investors with a view to achieving a significant investment return and the importance of the modelling undertaken by the specialist catastrophe modelling houses to assess the likelihood of a particular catastrophe occurring.


CAYMAN CAPTIVE 59


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