Catastrophe Bond Definition

Catastrophe Bond

Commonly referred to as a CAT bond, this is a fixed income instrument used by insurers to transfer risk and raise capital. Similar to other bonds, a CAT bond has a face value, coupon and time to maturity. What separates CAT bonds from the pack is something called a trigger. What this means is that if there is a catastrophe before maturity – such as a massive fire, earthquake or tsunami –resulting in massive claims, bondholders stand to lose the accrued interest and even a portion of the principle. It’s attractive to some investors because of potentially high interest rates and the fact that CAT bonds are not correlated to the broader capital markets.

Swiss Re to Issue First Longevity-Linked Cat Bond

Swiss Re is preparing to issue the first catastrophe bond linked to longevity risk . Catastrophe bonds ("cat bonds") are insurance linked securities that pass along risks to capital markets participants rather than an insurance company balance sheet. Cat bonds are more commonly structured for natural disasters such as earthquakes or hurricanes. The Swiss Re security is an eight year bond that will be based on the difference between the annualized mortality improvement in a UK-based age group...

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