What is an Extension Risk?
The risk that a cat bond's maturity is extended beyond its scheduled date due to ongoing loss development from a covered event.
Extension Risk
The risk that a cat bond's maturity is extended beyond its scheduled date due to ongoing loss development from a covered event.
How it works in practice
A cat bond matures on 31 December, but a major hurricane made landfall on 15 November. Because claims are still being tallied, the calculation agent cannot yet determine whether the trigger has been met. The bond's terms allow a six-month extension period for loss development. Investors cannot get their principal back until the assessment is complete, which may not happen until the following June.
Related glossary entries
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