What is a Cat Bond?
A catastrophe bond — a fully collateralised insurance-linked security that transfers specific catastrophe risk to capital market investors.
Cat Bond
A catastrophe bond — a fully collateralised insurance-linked security that transfers specific catastrophe risk to capital market investors.
How it works in practice
A Florida insurer sets up a special purpose vehicle in Bermuda, which issues $200 million in notes to institutional investors. The proceeds are placed in a collateral trust invested in money market funds. Investors receive quarterly coupons of SOFR plus 5.5%. If a named hurricane causes the insurer more than $3 billion in losses within the three-year risk period, the collateral is released to the insurer and investors lose their principal.
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