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💰 '''Catastrophe bond (CAT bond)''' is a [[Definition:Insurance-linked securities (ILS) | insurance-linked security]] that transfers a defined layer of [[Definition:Catastrophe risk | catastrophe risk]] from an [[Definition:Insurance carrier | insurer]], [[Definition:Reinsurance | reinsurer]], or government entity to [[Definition:Capital markets | capital markets]] investors. Issued as a fixed-income instrument — typically through a [[Definition:Special purpose vehicle (SPV) | special purpose vehicle]] — a CAT bond pays investors an attractive coupon above a risk-free benchmark in exchange for their principal being at risk if a qualifying catastrophe event occurs during the bond's term. Since the first issuance in the mid-1990s, the market has grown to more than $45 billion in outstanding capacity, making CAT bonds a mainstream pillar of the global [[Definition:Catastrophe risk transfer | catastrophe risk transfer]] ecosystem.

⚙️ Structurally, a sponsor — say a major reinsurer seeking to reduce its [[Definition:Peak peril | peak-peril]] exposure — works with an [[Definition:Investment bank | investment bank]] to create an SPV in an offshore jurisdiction like Bermuda or the Cayman Islands. The SPV issues notes to investors and places the proceeds in a [[Definition:Collateral | collateral]] trust invested in high-quality, liquid assets. If no triggering event occurs before maturity, investors receive their principal back plus periodic coupon payments. If a qualifying event does occur, some or all of the collateral is released to the sponsor to pay [[Definition:Insurance claim | claims]]. Triggers vary: they may be [[Definition:Indemnity trigger | indemnity-based]] (tied to the sponsor's actual losses), [[Definition:Industry loss index | industry-loss indexed]] (tied to aggregate market losses reported by agencies like PCS), [[Definition:Parametric trigger | parametric]] (tied to a physical measurement such as earthquake magnitude or wind speed), or [[Definition:Modeled loss trigger | modeled-loss based]] (tied to output from a designated [[Definition:Cat model | cat model]]). Each trigger type carries a different balance between [[Definition:Basis risk | basis risk]] for the sponsor and transparency for investors.

📈 For the insurance industry, CAT bonds address a fundamental constraint: traditional [[Definition:Reinsurance | reinsurance]] capacity is ultimately limited by the capital held within the insurance sector itself, whereas the broader capital markets represent a vastly deeper pool of money. By tapping pension funds, hedge funds, and dedicated ILS managers, sponsors can secure multi-year, fully [[Definition:Collateralized reinsurance | collateralized]] protection that is immune to the [[Definition:Credit risk | credit risk]] inherent in reinsurer receivables. Investors, in turn, gain exposure to a return stream that has near-zero correlation with equity and bond markets — an appealing diversification benefit. Regulatory bodies such as the [[Definition:National Association of Insurance Commissioners (NAIC) | NAIC]] have developed frameworks to allow insurers to recognize CAT bond recoveries for [[Definition:Solvency | solvency]] purposes, further embedding these instruments into the industry's risk management architecture.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Insurance-linked securities (ILS)]]
* [[Definition:Catastrophe risk transfer]]
* [[Definition:Special purpose vehicle (SPV)]]
* [[Definition:Parametric trigger]]
* [[Definition:Collateralized reinsurance]]
* [[Definition:Basis risk]]
{{Div col end}}

Definition:Catastrophe bond (CAT bond) - Revision history

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