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At War with the WeatherManaging Large-Scale Risks in a New Era of Catastrophes$
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Howard C. Kunreuther and Erwann O. Michel-Kerjan

Print publication date: 2009

Print ISBN-13: 9780262012829

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262012829.001.0001

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Innovative Insurance-Linked Securities for Financing Extreme Events

Innovative Insurance-Linked Securities for Financing Extreme Events

(p.172) (p.173) 8 Innovative Insurance-Linked Securities for Financing Extreme Events
At War with the Weather

Howard C. Kunreuther

Erwann O. Michel-Kerjan

The MIT Press

In the aftermath of the 2005 hurricane season, reinsurance prices for catastrophic risks increased dramatically in the United States. The pronounced reduction in the size of the retrocession market (reinsurance for reinsurers) forced reinsurers to assess whether such coverage would be available to them in the long term. These developments contributed to the growth of alternative risk transfer instruments that complement traditional insurance and reinsurance. This chapter examines the role of insurance-linked securities (ILS) in the securitization markets for catastrophes. In particular, it considers how the market for industry loss warranties and catastrophe bonds (cat bonds) has evolved in the wake of the 2004 and 2005 hurricane seasons. It also looks at some recent financial innovations in the ILS market as well as the impact of the respite from major hurricanes in 2006 and 2007.

Keywords:   hurricanes, reinsurance, financial innovations, alternative risk transfer instruments, insurance, insurance-linked securities, securitization, warranties, catastrophe bonds, United States

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