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About $4.9 billion in catastrophe bonds were issued in 2006, according to the world's biggest reinsurance company, Swiss Re. Just in the first half of 2007, another $3.8 billion were issued. Despite this increased activity, investors might not consider this market as enticing as it could be because of limitations in benchmarking and transparency.

Swiss Re attempted to solve these issues with the release of its CAT bond indices, which track the price return and total rate of return for all dollar-denominated bonds.

"Generally, investors are very positive just because it's providing greater transparency," added Richard Pennay, assistant vice president, Swiss Re Capital markets business.

With the increased clarity and the "look and feel" of other asset classes provided by the indices, said Klugman, the bond market could now attract investors who might have hesitated to enter before.

Previously, Swiss Re provided its constituents with market updates and weekly pricing indications on individual bonds. But to calculate marketwide performance, investors had to collect the historical data and do the math on their own.

The indices are currently up and running, and Swiss Re has publicly released the methodology behind them as well. Investors can replicate the methodology and provide feedback to the reinsurer, said Pennay.

Besides an overall index, Swiss Re calculates three subset indices: single-peril U.S. wind, single-peril California quake and BB-rated bonds.

Going forward, said Pennay, Swiss Re is hoping for cooperation from other trading banks to create a "commingled index" for greater consensus on market performance. And there is interest in setting up direct trades based on the indices themselves.

A secondary trading market on CAT bonds generated $1.5 billion in activity last year, said Klugman.

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September 1, 2007

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