The Future Potential for Terrorism Catastrophe Bonds

Abstract

In recent years, the number of catastrophic events has risen sharply. This has led not only to tragic losses for those involved, but also to serious losses in the insurance industry. As a result, insurers are increasingly seeking protection themselves. Innovative solutions emerged in the insurance industry, such as protection through catastrophe bonds. This paper evaluates this innovative solution and in particular analyses the potential of catastrophe bonds to protect against terrorism risks. Thereby various factors are assessed which could influence the emergence of a terrorism catastrophe bond market. It is found that there are many arguments for the issuance of terrorism catastrophe bonds. However, there remain various uncertainties about the future of terrorism that cannot be overcome. Nevertheless, by reducing the complexity of catastrophe bonds and thus gaining the confidence of investors, the issuance of terrorism catastrophe bonds could be supported.