CAT BONDS

A catastrophe bond (cat bond) is a risk-linked security that allows an issuer, typically an insurance or reinsurance company, to transfer the financial risk of a major catastrophe to the capital markets. Investors receive coupon payments in exchange for taking on this risk. If a predefined catastrophic event (e.g., a hurricane of a certain magnitude or an earthquake causing a specific level of industry loss) occurs, the investors forfeit their principal, which is then used by the issuer to pay its claims. This market was created to provide insurers with a source of risk capital outside of the traditional reinsurance market. Key players in this space include major reinsurers like Swiss Re and Munich Re, specialized ILS fund managers like Nephila Capital and Fermat Capital Management, and investment banks that structure and underwrite the deals.