Catastrophe Bonds Law and Legal Definition

Catastrophe Bonds are risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catasrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. They are often structured as floating rate bonds whose principal is lost if specified trigger conditions are met. If triggered the principal is paid to the sponsor. The triggers are linked to major natural catastrophes. Catastrophe Bonds are typically used by insurers as an alternative to traditional catastrophe reinsurance.