Alternative risk transfer transactions

Abstract

The constantly increasing growth of insured losses due to nature related catastrophic events (i.e. sudden events that cause significant losses to an individual or a group of people) has pressured the reinsurance industry to consider and develop alternative risk transfer products and transactions. These products are designed to alleviate the risk, in whole or partly, by putting into effect securitisation mechanisms in order to access adequate liquidity funds. Among them, Catastrophe (CAT) risk bonds are designed to transfer the financial consequences of natural catastrophic events (e.g. floods, hurricanes, earthquakes etc.) from the issuers to investors. CAT bonds quickly became popular, as they have been shown to successfully cover the insurers' liabilities, while, on the same time, they protect traditional reinsurance providers and governmental budgets.