30 November 2006

Event Loss Swaps

In an earlier earlier post I mentioned the similarity of Social Policy Bonds to Catastrophe Bonds. Readers might be interested to hear of an initiative by Deutsche Bank which, according to the Financial Times, “has begun making two-way markets in what it calls event loss swaps (ELS), which work in a similar way to credit default swaps and allow investors to buy or sell protection against insurance industry losses from large natural catastrophes.”

These derivatives, as with catastrophe bonds themselves, do not a seek to modify behaviour, but in principle there is no reason why they need not encourage a movement toward projects aimed at preventing the losses resulting from those ‘large natural catastrophes’. With larger funds at stake, and a broader definition of catastrophe than insurance losses, cat bonds and their derivatives could be equivalent in effect to Social Policy Bonds.

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