Catastrophe Bond
Also called: cat bond, insurance-linked security, ILS
A catastrophe bond transfers disaster risk to capital markets: investors earn a high coupon and lose principal if a defined event occurs — a hurricane above a set strength, an earthquake past a threshold. The appeal to investors is genuine diversification, since earthquakes are uncorrelated with equities. The appeal to sponsors is capacity that reinsurers alone cannot supply, and collateral that removes counterparty risk.