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 ?
Among these financial instruments, catastrophe bonds (cat bonds hereafter) have gained a predominant position (on the suitability of cat bonds as an alternative to reinsurance for the purpose of transferring natural catastrophe risk, see (Gibson, Habib, & Ziegler, 2014).
In 2009, the World Bank also debuted its MultiCat Program, which helps countries issue catastrophe bonds to insure themselves against the risk of natural disasters.
* The market for catastrophe bonds has reduced insurers' dependence on traditional reinsurance capital.
A fully collateralized instrument (such as the catastrophe bond) obviously fails to do so.
And while it is still too early to predict whether the economy will affect the catastrophe bond market, the 2009 first-quarter resurgence is a positive sign.
Aon Securities served as book runner, marketing the catastrophe bond to capital markets investors.
Citi helped draw up the $1-billion catastrophe bond covering four nations of the Pacific Alliance in Latin America, namely: Chile, Colombia, Peru and Mexico.
The Citi Group helped draw up the $1-billion catastrophe bond covering four nations of the Pacific Alliance in Latin America -- Chile, Colombia, Peru and Mexico -- that was successfully launched earlier this year.
In April 2016, the countries jointly approached the World Bank to explore whether they could obtain insurance through a catastrophe bond to protect themselves from the financial impact of natural disasters.
On the other hand, catastrophe bond returns might feel upward pressure if there is an increase in the risk-premium that is achieved in other asset classes.
"Swiss Re is pleased to provide continued support to the CEA on its largest catastrophe bond issuance to date," said Judy Klugman, Co-Head of ILS at Swiss Re Capital Markets.
The $425 million deal was Chartis' inaugural insurance-linked securities transaction, a catastrophe bond covering U.S.