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 ?
Due to an incomplete market for catastrophe risks and the lack of transparency on the CAT bond market, it is difficult to determine an accurate pricing model for CAT bonds.
As Zeng pointed out, the Cat bond market can still be tricky for investors to enter into, because, for one, no central market exists.
Entitled Cat Bond Update: First Quarter 2009, the report indicated that catastrophe bonds continued to be important tools for risk and capital managers, with three bonds coming to market in the first quarter of 2009, totaling $575 million in fresh capital.
9) A cat bond requires the investor to provide money up front that will be used by the firm if some type of triggering event occurs, such as a terrorist attack.
8 billion of new catastrophe bond and insurance-linked securities issuance in 2014 in its Deal Directory, the highest level recorded in a single year since the cat bond and ILS market emerged in the mid-1990's.
The new cat bond offers three years of annual aggregate protection for hurricanes and earthquakes affecting member countries, utilising the same triggers and measurements as that of the facility s underlying parametric insurance model.
Because the return on a CAT bond is directly tied to weather patterns or other geological factors outside the realm of traditional markets, such returns are largely uncorrelated with the risks of traditional investments.
The results demonstrate that a combination of reinsurance and CAT bond is optimal in the sense that it provides coverage for a lower cost and lower exposure at default than reinsurance itself.
Overall, cat bond spreads have declined across the board, as have corresponding costs of traditional reinsurance coverage.
The cat bond alleviates the transfer of risk on behalf of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a risk-pooling facility, which is created to limit the financial affect on its sixteen Caribbean member governments resulting from catastrophic earthquakes and hurricanes by rapidly offering financial liquidity when a policy is set off.