Catastrophe Bond
A high-yield debt instrument that transfers catastrophe risk from insurers to capital market investors.
A catastrophe bond (cat bond) is a special-purpose security issued by an insurer or reinsurer to transfer the financial risk of major natural disasters to the capital markets. If a defined catastrophe event occurs — a hurricane above a set intensity, an earthquake above a set magnitude — investors lose some or all of their principal. In return, they earn a yield significantly above risk-free rates in normal years.
The market has grown from under $5bn outstanding in 2000 to over $45bn today. Cat bonds are typically rated by AM Best, S&P, or Fitch and traded on the secondary market, making them the most liquid form of insurance-linked securities.
Maturities are typically 3 years. The principal is held in a collateral trust invested in ultra-safe instruments — US Treasuries or money market funds — eliminating counterparty credit risk for the cedant.
Example usage
“Swiss Re priced a $600m catastrophe bond with a US wind trigger at a spread of 350bps over SOFR.”
Frequently asked questions
What is Catastrophe Bond?
A high-yield debt instrument that transfers catastrophe risk from insurers to capital market investors. A catastrophe bond (cat bond) is a special-purpose security issued by an insurer or reinsurer to transfer the financial risk of major natural disasters to the capital markets. If a defined catastrophe event occurs — a hurricane above a set intensity, an earthquake above a set magnitude — investors lose some or all of their principal. In return, they earn a yield significantly above risk-free rates in normal years.
How is Catastrophe Bond used in practice?
Swiss Re priced a $600m catastrophe bond with a US wind trigger at a spread of 350bps over SOFR.
Related terms
More Catastrophe Bonds terms