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

Historical Cost Accounting Convention

An accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition.

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