Catastrophe Bond

9 months ago

Insurance Glossary Team

1 minute

Plain English Definition: A Catastrophe Bond is a financial instrument used by insurers to transfer extreme risk to investors in exchange for potential high returns.

What Catastrophe Bond really means for someone with an insurance policy

Insurance companies use Catastrophe Bonds to spread the risk of major disasters like hurricanes or earthquakes. Investors receive high returns but risk losing their investment if a covered disaster occurs.

Catastrophe Bond Real World Examples

An insurance company issues a bond to cover hurricane damage in coastal areas.
Investors buy a bond tied to earthquake losses in high-risk regions.
A reinsurer transfers some flood risk to bond investors through a Catastrophe Bond issuance.