The growing unpredictability in the financial market increases the demand for other investment opportunities which are not correlated with the various factor of overall market. Some of these securities are tied to industry losses, which means an investor has to understand how insurers write their own policies, what kinds of houses are covered, and where they are. This is not impossible to do, but it requires highly specialized skill.
The alternate investment could be addressed by Issuing of Cat Bond Fund in capital market however; it would be difficult to predict the response of retails investors in terms of investing in World’s first Cat bonds whose performance is reliant on natural risks. Nonetheless, catastrophe bonds do not carry mutual relationship with macroeconomic factors, which is rarely done in the world of investment. This unique feature lets them to carry costly diversification quality to collection of more long-established beneficial classes and carries particular application in doubtful financial surroundings where the investors may want to save themselves from market services.
One of the characteristics of catastrophe bonds that attract the investing companies is that its poor performance is likely to be self-correcting. If a natural disaster takes place, a number of reasons are provided to increase the quality of insurance which provides the investors to earn some or their losses in a small period of time. These characteristics can lead to a rapid increase in the demand for insurance
Even though, the frequencies of Catastrophe events are rare, but investor will analyze the performance of these bonds in best case, most likely and worst case scenario based on the various factors such as portfolio diversification, premium, coupon, default risk, rating, maturity period.
Unlikely like Capital market securities, credit risk doesn’t has any relation or impact on Cat bonds, because
1. Principal of investor is secured by a third-party trust agreement between the engaged parties; sponsor, SPV, investor.
2. The reinsurer principal amount will be only utilized by sponsor if the Catastrophe occurred and the financial losses greater than the highest define value.
[large]Capital and Money markets are the sources of investment for public investors, but these markets are highly volatile as their rate of return has direct relation with the macroeconomics variable such as Interest rates. On the contrary, Cat Bonds comparatively offering high yields irrespective of financial market performance.Cat bonds provide the opportunity of portfolio diversification that couldn’t be possible by restricting investment within the financial market. Furthermore, each type of Cat Bond is linked with different Catastrophe, so the investor can design Insurance Link Securities portfolio in a way to minimize the risks with minimal impact on returns.
Cat Bonds are rated as BB by huge rating agencies Standard & Poor’s, Moody’s and Fitch. As per the assigned rating these bonds will meet the obligation with the minimum probability of non-payment and in terms of percentage the default rate is 8.82% out of 100%. The default risk of Cat Bonds is 0.8 and sponsors are concerned about it as the other securities such as corporate Bond rated under the same system are rated higher. It is assumed that rating agencies are considering the perils rather than forecasting the monetary value of losses.
Time value of money plays important role in decision making of investors. In case of Cat Bonds the maturity period is between 3 to 5 years period which means investors will receive the coupons from SPV during this time period and will get principal amount from SPV on maturity of these bonds. In contrast, money market has maturity period of 12 months with low default risk and capital market has maturity of 5 plus years and carrying high risk. Weber has rightly identified that Bank Leu’s Cat Bond Fund would be attractive investment for the public investors, because it’s high returns, average maturity period and no relation with financial market.