The Shareholder Wealth Effects of Insurance Securitization: Preliminary Evidence from the Catastrophe Bond Market

Bjoern Hagendorff, Jens Hagendorff, K. Keasey

Research output: Contribution to journalArticlepeer-review

Abstract

Insurance securitization has long been hailed as an important tool to increase the
underwriting capacity for companies exposed to catastrophe-related risks. However, global
volumes of insurance securitization have remained surprisingly low to date which raises
questions over its benefits. In this paper, we examine changes in the market value of
insurance and reinsurance firms which announce their engagement in insurance securitization
by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution
of Cat bonds to global catastrophe coverage, we do not find evidence that Cat
bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we
report large variations in the distribution of wealth effects in response to the issue announcement.
We show that the wealth effects for shareholders in firms which issue Cat bonds
appear to be driven by explanations according to which Cat bonds offer cost savings relative
to other forms of catastrophe risk management (and less by the potential of Cat bonds to
hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms
which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage
(including Cat bonds) are low.
Original languageEnglish
Pages (from-to)281-301
JournalJournal of Financial Services Research
Volume44
Issue number3
DOIs
Publication statusPublished - 2013

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