Perilous paper

Bonds that pay out when catastrophe strikes are rising in popularity

Oct 3rd 2013

AFTER Superstorm Sandy flooded parts of the New York City subway late last year, insurers balked at underwriting the risks associated with future water surges. So the city tapped nearby Wall Street instead. Investors such as hedge funds and endowments paid $200m to buy a “catastrophe bond” issued by New York’s transit authorities. In the event that flooding in the next three years reaches Sandy-style levels, that money will go to pay for the damage. If there is no repeat, the investors will get their principal back and pocket hefty interest payments as their return.

This article appeared in the Finance & economics section of the print edition under the headline “Perilous paper”