Link of the day: Moneystuff on Catastrophe Bonds
Investors love to diversify portfolios. One way to do this is to buy or sell ‘catastrophe bonds’. Bonds like these pay high dividends if, for example, no more than 20 earthquakes of a certain size happen in a given year. If there are more earthquakes, the bond pays nothing. This is attractive to investors because these catastrophes often are not highly correlated with the rest of the economy: even if the economy does badly, you can still make decent money if the number of earthquakes or tornados or whatever is low. The World Bank also issued pandemic bonds in 2017. The idea is simple: if a pandemic occurs, the bonds default and the money is suddenly released to help in fight the very pandemic that triggered the bonds to default.
The Bloomberg piece talks a little more about why pandemic bonds may make less sense to investors than other catastrophe bonds and why it may create very weird incentives (e.g. bringing sick people across a border to trigger a ‘infections in several countries’-criterion). It also talks about a lot of other topics apart from catastrophe bonds. But this one I found particularly interesting.