Hurricane Katrina (2005) rewrote the rules of catastrophe-linked insurance game thoroughly, galvanizing the market truly into action for the first time in 2006. And although the activity characterizing the market has still not reached significant-enough proportions, what is really important is that the trends on various parameters that were seen first in 2006 and replicated in 2007, sent distinct signals about the future growth of the market as a resourceful alternative risk transfer mechanism. This is an insight into CAT bond market activity and significant current trends and what they imply for the future.

Insurers offering catastrophe-related products have learnt the hard way that relying exclusively on conventional avenues like reinsurance for transferring risk could be like courting bankruptcy. With each new generation catastrophe setting higher benchmarks for managing risk, primary insurers have been looking around for alternatives. And in this search for alternatives, convergence, or the meeting of insurance, the capital market is emerging as one of the most effective routes for transferring insurance risk.

In the process, Catastrophe Bonds (CAT Bonds) is one such capital market instrument that is emerging as a viable option for purposes of risk transfer. In 2006, in the aftermath of the hyperactive hurricane season of 2005 when Katrina came and rewrote the rules of risk management in insurance, the market for CAT bonds which had a slow take-off initially, started showing some very encouraging trends for the future. The trend in 2007 was even more reflective of the growing demand for CAT bonds; even in a year of relative calm as far as natural catastrophes were concerned and reinsurance rates were soft. These bonds are now refined enough to be absorbed into the mainstream catastrophe risk transfer market, and as a readily available alternative to traditional reinsurance, not just a means to tide over credit default exigencies in the world reinsurance markets.

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