Multiyear Cat Bonds and Investor Behavior
long term insurance
The management of catastrophic risk comprises a growing social, political, and economic challenge of our time. Recent natural disasters have dramatized the need for supplemental insurance avenues, including long term insurance and multiyear cat bonds, which hedge against long term liability exposure. An empirical examination of cat bond issuance volume over the past decade reveals that long term, multiyear cat bonds with tenors of more than 3 years pale in liquidity versus short term cat bonds. The paper helps to explain this asymmetry by building an integrated behavioral finance model for economic decision making in catastrophic contexts and by using results from the investor psychology literature.