1. Low basis risk. Compared with insurance futures or options with more standardized contracts, the basis risk of catastrophe bond contracts is lower, which makes the risk transfer more complete.
1. There is no credit risk. The funds raised by bond issuance are deposited by SPR company in trust institutions, and the balance of trust funds is only used after catastrophe losses occur or bonds expire. Therefore, the credit risk of buyers and sellers almost does not exist.
3. Increase underwriting capacity. By issuing catastrophe bonds, capital market funds can directly participate in the underwriting of insurance market risks, which increases the underwriting capacity of the whole catastrophe market, so the underwriting capacity of reinsurance or insurance companies will also increase.
4. Stabilize market prices. For a long time, the price of traditional catastrophe reinsurance is quite unstable, and the market price is often rising due to frequent catastrophes, and even no one is willing to provide insurance. Therefore, the price of catastrophe reinsurance market can be effectively stabilized by issuing catastrophe bonds.
5. Non-derivative products of bonds. Catastrophe bond is a kind of bond, not a derivative product. It can be used as an investment tool for life insurance industry, pension or annuity companies, and only as a bond transaction in the identification of regulatory laws and regulations.
6. It can reduce portfolio risk. Catastrophe bonds are zero beta investment tools, and there is no market risk. According to portfolio theory, catastrophe bonds can reduce portfolio risk.
Earn a reasonable reward according to the risks taken. In other words, according to the degree of risk-taking by investors, the risk interest reward is paid.