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 ?
In response to this request, the World Bank worked with the four countries to assess how catastrophe bonds could be designed to most effectively transfer risk to the capital markets.
At the most basic level you can have a pure catastrophe bond strategy or a pure collateralized reinsurance strategy," Evans said.
The market for catastrophe bonds has reduced insurers' dependence on traditional reinsurance capital.
The multilateral lender issued catastrophe bond linked to earthquake and tropical cyclone risk in 16 Caribbean countries in June 2014, it said in a statement.
Catastrophe bond structures, then as now, relied on full collateralization of the underlying risk transfer and offered protection only to a single client for a limited set of perils.
issued a $400 million catastrophe bond in a single tranche.
This also marks the World Banks largest catastrophe bond transaction to date, bringing the total amount of risk transactions it has facilitated to nearly US$4 billionfirmly establishing the institution as a leader in helping its member countries access risk insurance through the capital markets.
Nowadays, the sponsor's first catastrophe bond issue might cost a little bit more in terms of getting all the structures set up, but subsequent bonds are going to be as cost-effective or perhaps even cheaper than traditional reinsurance.
The activity followed one of the slowest third quarters since the P&C catastrophe bonds were first issued in the mid-1990s, according to a new briefing and analysis by GC Securities, a division of MMC Securities Corp.
Let's take a look at the catastrophe bond market's "checklist for growth," particularly as it pertains to the midmarket:
Ianus Capital" is the first catastrophe bond covering non-US risks to be issued in 2009, following a period of inactivity caused by the collapse of Lehman Brothers.