catastrophe bond

(redirected from Cat bond)

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 ?
To illustrate and test the previously developed approximations, we use secondary market cat bond prices provided by Lane (2002) and compare the theoretically derived ILW prices obtained by means of our approximations (see the "Pricing Binary ILWs by Replication Using Cat Bonds" section) with the actual ILW prices dated from April 1,2002 as provided by McDonnell (2002).
The Department of Finance (DOF) is exploring a plan to sponsor a "Catastrophe Bond" (Cat Bond) to help cover disaster-related risks in the Philippines and a separate offer of peso-denominated securities to offshore investors.
Issued by the World Bank in February, this was the second-largest cat bond ever issued and the largest sovereign risk insurance transaction in history, according to the organization.
Section 4 examines and comments on some cat bond issues faced by non-financial companies operating in the transport and infrastructure industry.
Global Banking News-July 11, 2017--Generali issues cat bond
Michael Popkin, managing director and co-head of ILS at JLTCM, said, "In 2017, we are pleased to close our seventh annual Oak Leaf cat bond, which is one of the longer running cat bonds in the marketplace."
BNY Mellon, a global leader in investment management and investment services, said it has been appointed trustee, paying agent, account bank and custodian for a USUSD100 million Turkish cat bond transaction designed to protect insurers against the risks of potential earthquakes.
BANKING AND CREDIT NEWS-November 10, 2015-BNY Mellon appointed trustee for Turkish cat bond
The briefing noted that seven new sponsors entered the 144A P&C cat bond market in 2014.
The industry also saw landmark transactions in 2013, with a record-setting $1.5 billion bond linked to hurricane risk in Florida and the world's first cat bond to protect against storm surge, created by New York City's Metropolitan Transit Authority after it faced $5 billion in damage in Sandy's wake.
Though it may seem that seven years of events wouldn't provide a large enough data set to create models and triggers, Johansmeyer said it's enough to create some sort of cat bond.