catastrophe bond

(redirected from Cat bonds)

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 ?
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.
Over the last 10 years the amount of cat bonds outstanding has increased from about $6 billion to $23 billion[sup.
Designed to access private capital and diversify the available funding sources, the XCF will be structured as a catastrophe bond program, whereby its financial obligations to countries over a three- to five-year financing window will be securitized, issued as cat bonds and financed by capital provided from private investors.
CAT bonds are not just issued by financial institutions--state-sponsored entities have done so as well.
He also said Aon has been in a "leadership position" with respect to alternative capital in the area of cat bonds.
On the one hand, 2013 was a banner year for cat bonds, sidecars, and collateralized reinsurance with $7.
The number of catastrophe or cat bonds outstanding could more than double from the current level of $19 billion to $50 billion by the end of 2018, according to a report from BNY Mellon, the global leader in investment management and investment services.
Cat bonds are high yield debt most often linked to insurance.
CAT bonds are of significant importance in the field of alternative risk transfer.
It is a matter of debate whether the speakers denied that or not, but what they did say definitely is that collateralized reinsurance has its own special place in the world of insurance-linked securities (ILS), separate from CAT bonds.
Catastrophe bond issuance activity is not expected to revisit 2007's record-breaking levels, but the firm estimates that 2009 is on track to be the third-busiest year for cat bonds, according to a briefing by Guy Carpenter & Co.