catastrophe bond


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Catastrophe bond

Also known as cat bonds, these are used as a way for insurance agents to transfer risks to investors. They are often attractive to investors because the risks (like that of an earthquake) are uncorrelated with the business cycle – and, hence, provide natural diversification.

Catastrophe Bond

A high-yield debt security backed by insurance premiums. Insurance companies issue catastrophe bonds in order to raise funds for hypothetical insurance payouts resulting from one or more stated events such as floods or fires. The bondholder receives coupons from what the insurance company collects in premiums. However, if the insurance company suffers a loss from a payout of one of stated events, the obligation to repay the bond is either relaxed or forgiven. The main advantage to a catastrophe bond, despite the stated risk, is the fact that it offers a high yield without much regard for the performance of the broader economy because people and institutions will almost always set money aside for insurance premiums.

catastrophe bond

A debt security with a payoff tied to the relative severity of a natural disaster such as a hurricane or earthquake. Bondholders are paid with insurance premiums but may have to accept reduced principal repayment in the event the specified disaster occurs during the life of the bond.
References in periodicals archive ?
Feig has returned to the firm's Capital Markets group in New York to continue his practice in risk-linked securities and structured and corporate finance, with particular emphasis on catastrophe bonds, cell tower transactions and other off-the-run asset classes.
Viewed in this light, the greater puzzle lies in understanding the success the catastrophe bond has had in establishing itself in a niche within the risk transfer market, and the lesser puzzle its failure to live up to the revolutionary expectations of the 1990s.
is a special purpose insurer, incorporated under the laws of Bermuda, which has established a program structure enabling potential future catastrophe bond issuances.
As well as achieving a new annual record for issuance of new catastrophe bond and ILS risk capital, the outstanding market of in-force cat bond and ILS transactions reached another new record, hitting $25 billion for the first time ever.
Rating agencies and sponsors of cat bonds with non-indemnity triggers are always concerned with the issue of basis risk, which is the chance that a catastrophe bond may not trigger for the covered perils because of an over-arching event threshold issue, even when the sponsor has suffered a loss.
Member of the Board of Management Thomas Blunck said, "The objective of the current transaction was to obtain cover in the newly revived catastrophe bond market for a period of three years at attractive conditions.
Sponsors received improved terms including increases in catastrophe bond maturity periods and a continued decrease in interest spreads to historical lows.
Primary writers tapping the catastrophe bond market helped make 2009 the third-best year ever for new risk capital issued.
Both draft criteria reports include an update to the industry totals for catastrophe bond issuances during 2011.