Catastrophe bonds (“Cat Bonds”) are a form of insurance risk securitisation. They are used to transfer an insurance risk from a sponsor (generally an insurance or reinsurance company) to investors.
Cat Bonds tend to cover a few extreme events caused by Mother Nature. These include earthquakes, hurricanes and typhoons. Events of the size required to affect a catastrophe bond tend to occur once or twice in a century.
Extreme mortality bonds covering risks such as pandemic, and non-natural catastrophe bonds have also appeared in the past few years.
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