iStock.com / liulolo
Cat bonds protecting sovereign risk present a relatively simple solution for governments and investors, but they are not free from complexities. The greatest of these is the design of the trigger, according to Clive O’Connell, partner, head of insurance and reinsurance at McCarthy Denning.
Properly constructed cat bonds have a great deal of potential for investors and governments alike. Nations, particularly developing ones, are given protection against disaster, and investors are given a diverse class of risk.
Provided that the risk can be modelled and priced correctly, and the funds procured to pay for the protection, cat bonds are a very effective solution to issues that face governments and investors alike.
Cat bonds may present a relatively simple solution, but they are not free from complexities—complexities that must be addressed at the outset. The greatest of these is the design of the trigger.