The take-up in catastrophe bonds has been positive ahead of the 2008 hurricane season according to Aon Capital Markets' managing director Bob Cooney.

Mr. Cooney said a number of individuals and companies were turning to derivative instruments such as cat bonds as a way of reinsuring themselves against natural catastrophe risks like hurricanes and earthquakes.

But he reckons that cat bonds complement the more traditional forms of reinsurance instead of acting as an alternative.

Cat bonds are structured debt instruments that transfer risk associated with low frequency, high severity events to the capital markets. They have been around since the industry faced similar capacity challenges after Hurricane Andrew in 1992.

Earlier this week, The Royal Gazette revealed ratings agency AM Best Co.'s latest report which predicted that turmoil in the credit markets could leave policyholders in limbo if a major hurricane hits the US this year, with investors showing a limited appetite for capital-market offerings designed to raise cash for claims payments. "There certainly seems to be more interest in cat bonds just to insure against natural catastrophe risks, specifically hurricanes and earthquakes," Mr. Cooney said.

"We have had a lot of interest and in some respects it is their capacity that would complement the natural reinsurance programmes and typically the bonds tend to be higher up the structure and it would take a big event to get to them.

"It is another source of capacity to be brought to bear for hurricane or earthquake risks.

"From a pricing perspective, once outside the one-in-100-year event, the bond pricing becomes competitive with traditional reinsurance.

"And at the end of the day it comes down to price."

Over the past few weeks there has been a drive to provide sufficient insurance coverage at an affordable price, with the renewal of the Florida Hurricane Cat Fund, the extension in limit of the Texas Wind Association from $500 million to $1 billion and the renewal of the Louisiana Citizens programme. Meanwhile, the Citizens Insurance Company of Florida is in the process of buying reinsurance cover up to $485 million.

Carvill is one reinsurance specialist that has come up with a new mechanism that attracts capital from sources outside of the traditional reinsurance markets including institutional investors and hedge funds, with these new sources able to invest via derivative instruments such as futures and options, which, in turn, can be purchased by companies looking to protect themselves against hurricane damage.

Insurance firms or state funds that write hurricane insurance can either buy protection in the form of derivatives or as a reinsurance policy via a transformer company set up by Carvill.

Stephen Breen, executive vice-president of Carvill America, said that the take-up on derivatives had been very encouraging, reflected in the fact that the Chicago Mercantile Exchange has recorded 28,800 hurricane contracts traded already this year.

"It has been a fantastic take-up and the future business is building all the time," he said.

"We are working on a number of trades that we hope to close in the next few weeks."