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 ?
Because CAT bonds are fully collateralized with highly rated securities, the rating is mainly performed by analyzing the probability that a triggering event will occur (Cummins, 2008).
Paul Schultz, Chief Executive Officer of Aon Securities, said: "Catastrophe bond issuance volume was down considerably in Q2, with only five new cat bonds issued during the quarter.
The most well-known concerned one of two cat bonds issued by special purpose vehicle Mariah Re, which paid $100 million to its sponsor, American Family Mutual Insurance, for losses on U.
Cat bonds once again set a quarterly record in the first quarter of 2016: $2.
Cat bonds are risk-linked securities that transfer a specified set of risks associated with hurricanes or earthquakes from an insurer or a nation state, to investors.
The number of catastrophe or cat bonds outstanding could more than double from the current level of $19bn to $50 billion by the end of 2018, according to a report from BNY Mellon
Approximately 72 percent of the cat bonds placed so far in 2013 deal with U.
Hurricane Andrew in 1992 and the 1994 Northridge earthquake were unlike anything the industry had seen before, and cat bonds were designed as risk transfer vehicles to help insurers hedge their bets.
The growth of cat bonds is being driven in part by investor demand," Attoh-Okine said.
Cat bonds and sidecars can be structured with a shorter duration, but you still have the underlying exposure to a longer peril.
On the one hand, 2013 was a banner year for cat bonds, sidecars, and collateralized reinsurance with $7.