News analysis - Cat bonds - you've never had it so good.

(From Reinsurance)

Sometimes I think our industry forgets it is in the finance business.

A man can't afford a house, so he goes to a bank to borrow the money to buy it. Now, saddled with a house and a mortgage, the bank politely reminds him that he really can't afford for that house to be burned down or flooded, or get blown down, or indeed be hit by falling space debris, and therefore he ought to buy some house insurance.

In fact, it isn't long before the man realises that he can scarcely afford to die either. Thus, a loyal new customer is formed and fresh insurance premium enters the life and non-life systems.

Although we often want to disguise this fact, it is the same with reinsurance and the retro market. Just as the average man in the street can't afford for his house to burn down, neither can a reinsurer allow his Gulf wind to blow out, his Japan quake to get flattened, or his northern European storm to take a pounding. And despite the inevitable howls of denial from the market - when limits are blown and market conditions allow - the payback always comes, except that in reinsurance, it is rarely the person who has paid the loss that gets paid back.

So, a reasonable way of looking at (re)insurance is as a sort of reverse-loan facility - which is, coincidentally, another way of describing a catastrophe (cat) bond.

Broken down to its fundamentals, a cat bond is essentially the same as a reinsurance contract. Risk is transferred for money in both cases - money flows in, money flows out. It's a two-way street.