Abstract

In 1992, hurricane Andrew was responsible for insured losses of US$19 billion in Florida. In 1994, the Northridge earthquake caused damages amounting to US$14 billion in California. At that time, a shortage of capital available from the insurance and reinsurance industries to sustain catastrophe losses was both anticipated and feared. The capital markets readily offered alternative vehicles through which catastrophe risk began to be transferred, thus initiating a convergence with the insurance market. This paper aims at gathering information relevant to the understanding of the process of the transfer of catastrophe event risk to the capital markets. First, it reviews the events that brought about emphasis on catastrophe risk management. Then, it dedicates attention to the peculiarities of catastrophe risk, before examining the design and evolution of the catastrophe derivatives themselves. Finally, a proposition for empirical research on the relationship between catastrophes and capital market returns is made. Furthermore, it is suggested that the theory of contagion in international finance would constitute an interesting framework for the analysis the relationship between catastrophe risk derivatives and other assets within a portfolio.