Catastrophe bond

Definition:

Also known as cat bonds, these are used as a way for insurance agents to transfer risks to investors. They are often attractive to investors because the risks (like that of an earthquake) are uncorrelated with the business cycle — and, hence, provide natural diversification. Cat bond is typically structured so that if a major natural catastrophe hits, the principal initially paid by the investors is forgiven and used by the sponsor (the insurer) to pay its claims to policyholders.

Investing Essentials


Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University

Term of the Day

Hidden load

A sales charge that is not explicitly disclosed or is buried in the fine print of a mutual fund prospectus or life insurance policy and therefore is not immediately apparent.

Subscribe to the Term of the Day via email Get the Term of the Day in your inbox!


Create your free portfolio