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.
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Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University
Term of the Day
Replacement cost insurance
Insurance that pays out the full amount required to replace damaged property with new property, without taking into account the depreciated value of the property.
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