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 ?
"And given the concentration of catastrophes in the retrocession market, it will also be interesting to see if any of the big global insurers will look at cat bonds or other ILS solutions as a way to secure more reinsurance for Japan as well," he said.
Among the most commonly used ART instruments are index-linked catastrophe loss instruments such as index-based cat bonds (2) or industry loss warranties (ILWs), for instance, whose defining feature is their dependence on an industry loss index and that may also depend on the company-specific loss resulting from a natural catastrophe.
Swiss Re noted that a number of varieties of cat bonds were exposed to potential losses as a result.
In the face of multiple smaller catastrophic events in 2018 and a meaningful series of catastrophes in 2017, non-life cat bond issuance remained strong with about $9.2 billion of new capital delivered, said the report, defining cat bonds as ILS transactions with meaningful liquidity.
Depending on the insurance coverage and its trigger, the Philippines, as sponsor of the Cat bonds, will get paid the principal contributed by investors if a catastrophe occurs.
Depending on the insurance coverage and its trigger, the Philippines as sponsor of the Cat Bonds will get paid the principal contributed by investors if a catastrophe occurs.
According to the DOF, Finance Secretary Carlos Dominguez welcomed a proposal from the Citi Group to help the government in sponsoring catastrophe bonds (Cat bonds).
Largely employed by insurance and reinsurance companies, cat bonds are not a financial instrument that is commonly utilized by non-financial companies.
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."
The market for CAT bonds has developed rapidly since their introduction about 20 years ago.
Cat bonds generally provide multi-year coverage, usually for three years.