Hard markets, hard times: On the inefficiency of the CAT bond market

Götze, Tobias; Gürtler, Marc

doi:10.1016/j.jcorpfin.2019.101553

Cited by 11 publications

(5 citation statements)

References 56 publications

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“…The authors conclude that high-risk insurers are charged higher premiums by the capital market based on publicly-observable risk measures, whereby CAT bonds are less attractive than reinsurance for this group of insurers. 3 This assumption is confirmed by Götze and Gürtler (2020), who show that insurer characteristics influence the premiums of CAT bonds. Although Hagendorff et al (2014) offer insights into the determinants of CAT bond issuance, they do not investigate the substitutional use of CAT bonds and reinsurance, which is the subject of our study.…”

Section: Literature Reviewmentioning

confidence: 85%

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Risk transfer beyond reinsurance: the added value of CAT bonds

Götze

Gürtler

2021

Geneva Pap Risk Insur Issues Pract

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Reinsurance and CAT bonds are two alternative risk management instruments used by insurance companies. Insurers should be indifferent between the two instruments in a perfect capital market. However, the theoretical literature suggests that insured risk characteristics and market imperfections may influence the effectiveness and efficiency of reinsurance relative to CAT bonds. CAT bonds may add value to insurers’ risk management strategies and may therefore substitute for reinsurance. Our study is the first to empirically analyse if and under what circumstances CAT bonds can substitute for traditional reinsurance. Our analysis of a comprehensive data set comprising U.S. P&C insurers’ financial statements and CAT bond use shows that insurance companies’ choice of risk management instruments is not arbitrary. We find that the added value of CAT bonds mainly stems from non-indemnity bonds and reveal that (non-indemnity) CAT bonds are valuable under high reinsurer default risk, low basis risk and in high-risk layers.

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Section: Literature Reviewmentioning

confidence: 85%

“…According toBraun (2016),Gürtler et al (2016), andGötze and Gürtler (2020), the mean term of a CAT bond is three years.…”

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confidence: 99%

Risk transfer beyond reinsurance: the added value of CAT bonds

Götze

Gürtler

2021

Geneva Pap Risk Insur Issues Pract

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“…Nevertheless, Götze and Gürtler (2019) find that some sponsor characteristics can affect yield spreads in hard and neutral market phases. Kreps, 2002).…”

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confidence: 93%

Trading and liquidity in the catastrophe bond market

Herrmann

Hibbeln

2022

J of Risk & Insurance

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We provide first insights into secondary market trading, liquidity determinants, and the liquidity premium of catastrophe bonds. Based on transaction data from TRACE (Trade Reporting and Compliance Engine), we find that cat bonds are traded less frequently during the hurricane season and more often close to maturity. Trading activity indicates that the market is dominated by brokers without a proprietary inventory. Liquidity is high in periods of high trading activity in the overall market and for bonds with low default risk or close to maturity, which results from lower order processing costs. Finally, using realized bid-ask spreads as a liquidity measure, we find that on average, 21% of the observable yield spread on the cat bond market is attributable to the liquidity premium, with a magnitude of up to 141 bps for high-risk bonds.

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“…Another stream of studies focuses on selected types of financial innovations, concerning the process of their creation, implementation, and diffusion in the financial system, usually from the perspective of their creators (Frame and White 2014;Klimontowicz 2019;Klimontowicz and Harasim 2019;Marcinkowska 2012;Merton 1995;Silber 1983;Świecka et al 2020;Vermeulen 2004) or their end-users (Kie żel and Smyczek 2015; Lebelle et al 2020;Lorenz and Pommet 2020;Saksonova and Kuzmina-Merlino 2017). In this stream of literature, the dominant approach applies a case-by-case basis, as particular types of financial innovations are analyzed in detail (e.g., Cocco and Gomes 2012;Götze and Gürtler 2019;Harasim and Klimontowicz 2013;Polasik and Wiśniewski 2009;Tapscott and Tapscott 2017).…”

Section: Introductionmentioning

confidence: 99%

Barriers to Financial Innovation—Corporate Finance Perspective

Błach

2020

JRFM

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This paper addresses the application of financial innovations from the corporate finance perspective. The objective is to identify and prioritize the main types of barriers to the implementation of financial innovations by nonfinancial firms. The motivation behind the study lies in the importance of financial innovations for the firms’ ability to create value. As proven by the extensive literature review, comprehensive studies on financial innovation applications by nonfinancial firms are relatively rare. To cover this cognitive gap, the theoretical argumentation followed by the discussion of results of the empirical research are presented in this paper. The paper provides the results of two-stage survey research, aiming to find opinions of financial managers (end-users) and experts (creators of innovation) on the main barriers to financial innovations in Poland. According to managers, the most important are exogenous barriers, including: (1) Unclear tax and accounting regulations, (2) complex construction of financial innovations, and (3) transaction costs related to their application. On the other side, the experts from financial institutions recognized the greater importance of endogenous factors such as: (1) Lack of sufficient knowledge about financial innovations and (2) the reluctance to change observable in many firms. This study contributes to the ongoing debate on financial innovations by adding the perspective of corporate financial strategy. It also offers insights into the potential actions (at the institutional and individual level) aiming to reduce the barriers and support the implementation of financial innovations by nonfinancial firms.

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Hard markets, hard times: On the inefficiency of the CAT bond market

Cited by 11 publications

References 56 publications

Risk transfer beyond reinsurance: the added value of CAT bonds

Risk transfer beyond reinsurance: the added value of CAT bonds

Trading and liquidity in the catastrophe bond market

Barriers to Financial Innovation—Corporate Finance Perspective

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