Insurance securitization has long been hailed as an important tool to increase theunderwriting capacity for companies exposed to catastrophe-related risks. However, globalvolumes of insurance securitization have remained surprisingly low to date which raisesquestions over its benefits. In this paper, we examine changes in the market value ofinsurance and reinsurance firms which announce their engagement in insurance securitizationby issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contributionof Cat bonds to global catastrophe coverage, we do not find evidence that Catbonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, wereport large variations in the distribution of wealth effects in response to the issue announcement.We show that the wealth effects for shareholders in firms which issue Cat bondsappear to be driven by explanations according to which Cat bonds offer cost savings relativeto other forms of catastrophe risk management (and less by the potential of Cat bonds tohedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firmswhich face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage(including Cat bonds) are low.
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