Attachment and exhaustion
The loss levels where investor principal first becomes exposed and where it can be fully exhausted.
Cat bond fundamentals
What is a catastrophe bond?
A catastrophe bond, or cat bond, is a security that transfers defined catastrophe risk from a sponsor to investors. Investors receive a coupon, but principal can be reduced if a qualifying event meets the bond trigger.
How it works
The basic cat bond structure
A sponsor transfers a defined risk to a special purpose vehicle. Investors buy notes issued by that vehicle. The proceeds are held as collateral. The sponsor pays a premium, investors receive coupon payments, and the collateral may be used to pay losses if the trigger is met.
Cat bonds can cover perils such as hurricanes, earthquakes, severe convective storms, wildfires, or other defined events. The details depend on the term sheet, peril region, attachment point, exhaustion point, and trigger type.
Key terms
Concepts to understand
Trigger type
The mechanism that determines whether a payout is made, such as indemnity, industry loss, modelled loss, or parametric.
Expected loss and spread
Expected loss estimates the modelled annual loss cost. Spread is the compensation investors require above collateral return.
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