Alternative reinsurance: Using catastrophe bonds and insurance derivatives as a mechanism for increasing capacity in the insurance markets

Between 1989 and 1995, total insured losses from earthquakes, hurricanes, and other natural disasters amounted to $75 billion, some 50% higher than they were for the entire 38-year period before it. With the increase in storm frequency and severity, the insurance markets are facing a capital shortage. With its assets in excess of $19 trillion, the capital markets are the likely choice to look for the needed capacity. Recently, the insurance industry has moved into the capital markets using a collection of derivative and traditional products including swaps, options, and bonds. The recent success of these products may be marking the beginning of a new era in the insurance industry and the development of a new class of financial products, or it may be just a speculative bubble that will burst during the next round of catastrophes.