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.
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Nicolas Faller, chief executive officer at Union Bancaire Prive Asset Management feels that emerging markets, high yield, private debt, credit, investment grade and catastrophic bonds offer value in the fixed income market, where bond yields are rising on the back of expectations of higher inflation.
Other bonds that UBP prefer are the catastrophic bonds - which are high-yield debt instrument that is usually insurance-linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake - for which they have been having discussions with sovereign funds and their institutional clients.
This includes building their assets, providing catastrophic bonds, weather index insurance schemes, and crop/livestock insurance for farmers and rural populations," said Adesina.
Holdings in "other assets," which comprises investments such as real estate, hedge funds, private equity, commodities, and even catastrophic bonds in the reinsurance area, nearly doubled from 16 percent to 29 percent over the same period.
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