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In October 2007, the Milken Institute held a Financial Innovations Lab in New York to address ways to expand and share insurance risk in the area of catastrophe coverage. In particular, participants looked at catastrophe risk bonds, also known as cat bonds. These are securities that offer an alternative source of funding for reinsurance, which occurs when a primary insurer contracts with another insurer to diversify risk. Cat bonds return high interest rates to investors while providing insurance companies with the capital to pay out the huge losses that may arise from natural disasters like hurricanes, droughts, and earthquakes, or man-made calamities, such as terrorism. When such catastrophes occur, the consequences may be so severe, and not only to the insured, that they can drive insurance companies into insolvency.
The Lab brought together representatives from institutional investment firms, academia, the legal profession, and insurance, reinsurance, and reinsurance intermediary companies to explore innovations in capital market insurance solutions. If these kinds of instruments can achieve greater acceptance in the larger capital and investor markets, insurers should be able to offer wider and more affordable disaster coverage.
Participants tackled a variety of questions through presentations, case studies, and moderated discussions.