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 ?
The World Bank, the leading provider of natural disaster risk insurance for emerging and developing countries, has issued catastrophe bonds that will provide a total of US$1.
The transaction is one of the largest annual catastrophe bonds, and the CEA is well prepared to handle the economic consequences of potential earthquakes.
Despite the lower supply of catastrophe bonds for sale, many investors were reluctant to increase bids, preferring to hold onto cash in anticipation of new issues," Aon says.
ILS funds, primarily domiciled in Bermuda and Switzerland, employ different investment strategies, some for example investing only in catastrophe bonds and others in multiple ILS instruments.
BANKING AND CREDIT NEWS-February 18, 2016-BNY Mellon is top global trustee for catastrophe bonds in 2015
M2 EQUITYBITES-February 18, 2016-BNY Mellon is top global trustee for catastrophe bonds in 2015
Detailed understanding of catastrophe bonds as an alternative platform to transfer risk to the capital market.
Now, the nation is looking at defraying the costs of future calamities with catastrophe bonds.
Catastrophe bonds feature full collateralization of the underlying risk transfer and thus abandon the reinsurance principle of economizing on collateral through diversification of risk transfer.
Catastrophe bonds pay interest like conventional bonds during normal times, but convert to equity during contractually specified stressful times like those experienced during the fall of 2008.
The data does not point to a lack of faith in hurricane prediction, but rather to the increased interest in catastrophe bonds as a method of risk transfer.
The ILS Indices track the performance of catastrophe bonds in each of four portfolios: All Bond, BB-rated Bond, U.