The Trouble with Catastrophe Bonds

Catastrophe bonds are designed to provide capital to insurance companies when extreme, big-scale disasters occur. Japan's mid-March 2011 earthquake, tsunami, and nuclear reactor crisis would seem to qualify. Yet it turns out the catastrophe bond market will not be of much help in covering Japan-related insurance losses. Such bonds often have covenants that strictly limit the type and location of a disaster they will cover. Much of the $1.7 billion worth of cat bonds focused on Japan were designed for quakes only in the Tokyo metropolitan area, the country's economic and financial market hub that accounts for about 40% of the nation's economy. However, insurance companies show no signs of abandoning the cat bonds, even though the market failed to deliver a big payout for the Japan disaster. Reinsurers may need to issue new securities to cover future losses in Japan.