Cat Bonds

Essay 6- CAT bonds

CAT bonds are also known as catastrophe bonds and they are risk related securities that exchange a specified set of risks to investors by the sponsors. They were first made and active after the Northridge earthquake and hurricane Andrew around the 1990s. If there were a major catastrophe, there would not be enough to cover all of the damages from just premiums of the insurance company. CAT bonds was used by the insurance companies to lighten some of the risks that they bear. They issue the bonds through an investment bank and then it would be sold to the investors. These bonds have its natural risks, it is rated near a BB and the maturities are usually less than 3 years. If there were no catastrophe, then the insurance company would pay a coupon with great return to the investors. In cases where if there were a catastrophe, then all is taken with the principal and it would be used to pay for the claim holders. These type of bonds are usually used by the insurers as an alternative to traditional catastrophe reinsurance. For example, if the insurer