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CATASTROPHE BONDS AS INNOVATIVE TOOLS OF CORPORATE FINANCIAL MANAGEMENT – POTENTIAL APPLICATION AND LIMITATIONS
Abstract
This conceptual paper is based on the document analysis aimed at systemizing knowledge about the potential application of catastrophe bonds (cat bonds) by non-financial companies, together with the identification of the limitations of their usage. We also analyse market data to provide information about the current state and development of cat bonds. After examining theoretical publications and the available market data, we have identified several areas of cat bonds application within corporate financial management. First of all, cat bonds can be applied in investment decisions as a financial instrument that provides an opportunity to generate higher return compared to traditional bonds. After accepting a catastrophe event risk, cat bonds can be applied in order to diversify the investment portfolio. Cat bonds can be also used by companies as a financing instrument, when and if traditional sources of debt capital are not available due to unfavourable market conditions. In addition, cat bonds can be used to combine the process of acquiring funds with risk management by transferring insurable risk to the capital market.
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