Insuring California earthquakes and the role for catastrophe bonds

The 1994 Northridge earthquake sent ripples to insurance conpanieseverywhere. This was one in a series of natural disasters such asHurricane Andrew which together with the problems in Lloyd's of Londonhave insurance companies running for cover. This paper presents a calibration of the U.S. economy in a model with financial markets forinsurance derivatives that suggests the U.S. economy can deal with thedamage of natural catastrophe far better than one might think.