Catastrophe bond market doubles in size

investmentweek.co.uk:

'The challenge for this asset class is that, despite the years of data on such naturally occurring events, reinsurance companies try to assign reasonable probabilities to the occurrence of a specific event.'

This growth trend, which coincides with the greater frequency of natural disasters, emphasises the ongoing need for insurance for losses related to catastrophes.

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Investors are attracted to catastrophe bonds because of their lower correlation to traditional bond and stock markets, due to the unpredictable nature of weather-related disasters and potential for higher returns, Morningstar found.

Catastrophe bonds work with the investor receiving their money back plus interest if no disaster occurs.

If a disaster does occur, the investor can lose some, or all, of their money, depending on the cost to the reinsurer.

Mara Dobrescu, director of fixed income research at Morningstar, said this higher risk and potential for individual bonds to experience significant losses «means diversification is key when investing in a catastrophe bond strategy».

She added: «The challenge for this asset class is that, despite the years of data on such naturally occurring events, reinsurance companies try to assign reasonable probabilities to the occurrence of a specific event.

»But they lack any consistent predictability, particularly as climate change introduces additional uncertainties."

On average, Morningstar found funds in the catastrophe bond cohort delivered on their promise of outperforming the broader global bond market and delivering low correlation to most traditional asset classes.

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However, a majority