Are Cat Bonds Growing Up?

Cat bonds, or catastrophe bonds, have been around since 1997. Generally, CAT bonds have been issued by insurance companies or reinsurers to cover insurance losses from major natural catastrophes, such as hurricanes and earthquakes. Recently, corporations have been slowly moving into the the issuance of cat bonds. For example, a corporation could issue a cat bond that has a trigger based on a natural catastrophe destroying a manufacturing plant. For the corporation, the cat bond could replace traditional insurance on the plant. A major reason that is enticing corporations is that cat bond costs have been dropping for issuers. In the second quarter of 2012, investors offered a price 40 percent lower on a cat bond covering Florida hurricanes than the price of a similar bond issued the previous year.