Glossary

Catastrophe bond

A security sold to investors that pays interest but loses principal if a defined catastrophe occurs, giving an insurer or reinsurer multiyear protection.

Also called: cat bond, insurance-linked security, ILS, event-linked bond

A catastrophe bond transfers disaster risk from an insurer, reinsurer or other sponsor to capital market investors. The sponsor sets up a special purpose vehicle that issues notes and puts the proceeds in a collateral trust, invested in highly rated short-term securities. Investors earn a coupon, funded by the sponsor's premium plus collateral returns. If a defined event happens, the trigger is met and the collateral pays the sponsor instead of returning to investors, who can lose some or all of their principal.

Triggers vary. An indemnity trigger tracks the sponsor's actual losses; an industry index trigger tracks aggregate market loss; a parametric trigger uses measured event data such as wind speed or magnitude; a modeled-loss trigger runs the event through a model. Terms are typically about three years. Say a sponsor buys $100 million of protection against Gulf hurricane losses above $1 billion. If a storm pushes losses through that attachment point, the bond pays out, up to $100 million.

Because the collateral is fully funded up front, the sponsor faces no credit risk that investors cannot pay, a draw compared with traditional reinsurance. The bonds also add capacity that can cushion reinsurance pricing after big loss years. Most business owners never buy one directly, but the market affects what carriers charge for property catastrophe coverage. The guide on Catastrophe bonds and ILS: how they work and who they affect covers structures and pricing, and catastrophe model explains how risk is measured.

Last reviewed October 10, 2026

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Related terms

Sidecar A special-purpose vehicle funded by outside investors that takes a share of an insurer's or reinsurer's business for a set term, usually collateralized. Parametric insurance Coverage that pays a pre-agreed sum when a measured event, such as a wind speed or earthquake magnitude, crosses a set threshold, without proof of actual loss. Rate on line The premium for a layer of reinsurance or excess coverage divided by that layer's limit, showing the price paid for each dollar of protection. Catastrophe model Software that simulates thousands of hurricanes, earthquakes and other disasters against a portfolio of locations to estimate insured losses and odds. Treaty reinsurance A reinsurance contract that automatically covers a defined portfolio of an insurer's policies, instead of reinsuring one risk at a time.

Related guides

The Bermuda insurance and reinsurance market Why Bermuda is a global hub for property catastrophe reinsurance, captives and cat bonds, its regulation and 15% tax, and how it affects U.S. business buyers. Catastrophe bonds and ILS: how they work and who they affect A cat bond lets investors fund disaster reinsurance and lose principal if a trigger is hit. How it works, what 2026 data shows and why buyers feel it. The cyber insurance market: capacity, pricing and appetite Where cyber pricing, capacity and carrier appetite stand in October 2026: rates still falling, loss ratios rising, Zurich now owning Beazley, and what to do. The January 1 reinsurance renewals explained: the 2026 results Why January 1 sets the reinsurance market, what Guy Carpenter, Gallagher Re and Howden Re reported for 1/1/2026, and how softer cat pricing reaches buyers. Sidecars, collateralized reinsurance and ILS funds explained How investor-backed reinsurance works: sidecars, collateralized contracts and ILS funds, with 2026 capital figures and what they mean for your coverage. Systemic cyber risk and cyber catastrophe bonds Why one cloud outage or worm can hit thousands of insureds at once, how reinsurers and cyber cat bonds spread that risk, and what it means for your own policy.

Related insurers

American Coastal Insurance St. Petersburg insurer of Florida condo associations, HOAs, apartment complexes and assisted living facilities, sold only through two MGAs since 2007. Palomar La Jolla specialty insurer known for earthquake and DIC property, now growing in contractor casualty, inland marine, surety, crop and fronting. Sutton National A-rated program carrier that issues admitted and surplus lines policies for program administrators and reinsurers; you reach it only through a program.