
The Bonds of Catastrope - grandsham
http://www.cabinetmagazine.org/issues/57/burnett.php
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SkewnessLover
I worked in the cat industry for a few years and I take huge issue with the
author's conclusion.

"Indeed, some specific corporate entities are large enough in themselves to be
meaningful drivers of such changes. Upon which those same entities are now in
a position, potentially, to capitalize, by means of well-placed cat bond bets.
Which, looked at this way, amount to bets on a game in which they are actual
players. "

Let's look at how someone could make money off of a parametrically-triggered
cat bond: 1.) The "profit" is taking out a loan and not being required to
repay it. 2.) The event occurs within the timeframe of the bond (3 years max,
the Artemis site may reveal some longer terms but in my experience most are
relatively short). 3.) The bond issuer has no offsetting exposures (i.e. an
insurance company that does NOT write earthquake insurance issuing an
earthquake bond).

While all of these are theoretically possible, the mechanics of the cat bond
market make all 3 occurring at once highly unlikely and probably a terrible
investment. The bankers selling the bond would have a difficult time finding
buyers for a non-insurance entity. The cat bond being triggered would
immediately focus a lot of attention on the issuer, leading to some pretty
terrible PR. The list goes on.

Simply put, it is a huge unleveraged bet on something the issuer MAY have some
control over. If an issuer wanted to adversely affect a number of innocent
people for financial gain, there are a lot more profitable ways to do it via
lobbying or other means.

Cat bonds are very interesting and complex instruments and the dominance of a
few catastrophe models is an issue, especially when they are wrong (the
Tuscaloosa and Joplin events led to many investors in a few bonds losing their
principal because the probability of these tail events was grossly
underestimated).

This sounds more like an academic looking for another way to demonize a
socially beneficial area of finance.

