RiskProf mentions that an Insurance Journal Article references plans for a new class of catastrophe based securities to be created and traded on the Chicago Mercantile Exchange.
(For a quick primer on cat bonds / cat risk securitization, see Wikipedia.)
That reminds me of one idea that has been knocking around inside my head for a while on the Florida property insurance mess.
Last month, the Florida state legislature moved to ease issues in the property insurance market by legislating increased availability of primary coverage and reinsurance by fiat, deferring the actual costs of that availability until after the next bad storm season.
To the extent that part of the problem has been that of limited supply of cat capacity…I wonder if it would have been possible to address part of the problem by increasing investors’ demand for cat bonds and similar securities.
In this theoretical dream version of Florida, I could imagine the state requiring that a certain portion of variable compensation paid within private businesses be invested in cat bonds…or that certain guaranty deposits made by corporations or other entities operating in the state be invested at least in part in cat-based securities.
I haven’t crunched any numbers on this to get a feel for its feasibility, and I’m sure there are many reasons why this sort of a scheme might not work. However, it just seems to me that if the coverage availability issue is that of insurers and investors simply being unwilling to provide capacity, creating new incentives to create capacity would be a more rational solution than all the magic-wand-waving that has taken place in Tallahassee.