The reinsurance industry, however, is less regulated than traditional insurance, said Erwann Michel-Kerjan, an industry specialist at the Wharton School of Business at the University of Pennsylvania, so reinsurers have an easier time raising prices on traditional insurers. He pointed out that the price of reinsurance doubled after the major hurricanes of 2004 and 2005. It went up another 90 percent to 95 percent in Chile after the earthquake there last year.
“After every major disaster,” he said, “the price of reinsurance increased very significantly.”
Hoping to deflect some of this cost, some traditional insurers are looking to cat bonds as a new form of reinsurance. The California Earthquake Authority just completed a $150 million deal in which it has issued three-year catastrophe bonds.
“So they were like, ‘Wow, is there any way we can get a more stable price?’ ” Mr. Michel-Kerjan said. “And that’s what cat bonds provide.”