katrina was category 1 when it hit florida.
how big was katrina when it hit florida?
category 1
bullet::::- gore's view: "and then of course came katrina. it is worth remembering that when it hit florida it was a category 1, but it killed a lot of people and caused billions of dollars worth of damage. and then, what happened? before it hit new orleans, it went over warmer water. as the water temperature increases, the wind velocity increases and the moisture content increases. and you'll see hurricane katrina form over florida. and then as it comes into the gulf over warm water it becomes stronger and stronger and stronger. look at that hurricane's eye. and of course the consequences were so horrendous; there are no words to describe it. ... there had been warnings that hurricanes would get stronger. there were warnings that this hurricane, days before it hit, would breach the levies and cause the kind of damage that it ultimately did cause."
dimmock v secretary of state for education and skills
for example, if an insurer has built up a portfolio of risks by insuring properties in florida, then it might wish to pass some of this risk on so that it can remain solvent after a large hurricane. it could simply purchase traditional catastrophe reinsurance, which would pass the risk on to reinsurers. or it could sponsor a cat bond, which would pass the risk on to investors. in consultation with an investment bank, it would create a special purpose entity that would issue the cat bond. investors would buy the bond, which might pay them a coupon of libor plus a spread, generally (but not always) between 3 and 20%. if no hurricane hit florida, then the investors would make a positive return on their investment. but if a hurricane were to hit florida and trigger the cat bond, then the principal initially contributed by the investors would be transferred to the sponsor to pay its claims to policyholders. the bond would technically be in default and be a loss to investors.
catastrophe bond