Insurers sold a record $7 billion in catastrophe bonds in 2007, amounting to a huge bet that a major natural disaster would not occur, according to the Toronto Star.
Catastrophe bonds are an alternative to re-insurance, which pools insurance policies and insures insurers. (Confused yet?)
By selling catastrophe bonds, insurers offer investors a good return as much as 20% if no disaster happens. But if a hurricane strikes, say, insurers lose their investment.
In an age of global warming, when every scientific projection is for more frequent and intense storms, more intense droughts, more damaging floods, more tornadoes, more wildfires (and on and on...) this is a bet that would appear to be riskier and riskier.
But if the housing crisis has taught us anything, investors can be blind to risk. Since 2005, the Atlantic storm season hasn't seriously damaged U.S. assets, but the overall trend in the past decade whether because of global warming or not has favored more hurricanes, and more major storm landfalls.
Place your bets.
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