CAT BONDS AND BLACK SWANS. About nine years ago I posted on two new developments—cat bonds and the phrase “black swan”. I posted here in August 2007 about “cat bonds”—catastrophe bonds—which were a relatively new financial instrument at the time.
Nicholas Nassim Taleb’s book THE BLACK SWAN was released on April 17, 2007 (wikipedia entry here). I first posted on Taleb’s concept of black swan events here in September 2007—one year before the Lehman bankruptcy. The Lehman bankruptcy was a paradigm of the black swan.
The connection between cat bonds and black swans is that cat bonds are well suited to provide protection against “black swan” events, which are events which have a very low probability of happening, but which will have a very large impact if they do. Cat bonds compete with reinsurance, which is how multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss exposure of the original insurer .
Leslie Scism and Anupreeta Das had an article in the Wall Street Journal (August 8, 2016) which says that: “Sales of cat bonds proceeded haltingly until the financial crisis” but that now cat bonds have “exploded in popularity”.