Provide a 8 pages analysis while answering the following question: On Disaster Bonds. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required.
The insurers and investors stand a chance to lose in case of a catastrophe. It involves risk-taking. investors acquire disaster bonds for a principal and then enjoy the high rate interest accumulation as long as the disaster does not occur. According to leading experts in risk management, “Catastrophe bonds are fixed income securities, typically issued by insurance companies, which pay an attractive yield to investors, but with a provision that should a specific predetermined event…..occur, bondholders, suffer the loss of their income and potentially all their capital” (197). Events may be due to natural damage or human-induced disasters where the bond may cover either the whole or part of the damage preventing the buyer from reaching the unbalanced sheet. The risk is conveyed to the investors rather than the insurers. The structure of CAT bonds is expressed in CAT bonds demystified (See fig. 1).
These bonds are now used widely as they may forego interest and principle either in part or whole as stated in the condition. They require investors’ specialized knowledge and skills in the judgment of where to invest. However, the jurisdiction of the application affects the disaster bonds’ effect on the parties involved. In the above structure, SPV or SPE is the established entities that insurance companies forward the reinsurance agreement to, which then relay’s the default provisions, as reflected in the agreement as a note. if the terms are approved, transactions are managed to generate money market returns where the SPV or SPE transfer back the principal and accumulated interests in cases of the minimal risk involved (“CAT Bonds Demystified,” Rsm).
The disaster bonds act like financial instruments. they were first issued in the mid-1990s and most specifically in 1997 in American history. The American continent has had numerous attacks, including US blizzards and tornadoes in 1993, the Northridge earthquake in 1994, and especially the numerous hurricanes in Mexico, the US, the Caribbean, and the Bahamas among others.