Insurance-Linked Securities

Capital market instruments whose repayment depends on insurance outcomes, chiefly catastrophe bonds.

Overview

Cat bonds pay sponsors a layer of protection funded by investor principal: if a defined event or aggregate loss trigger hits, investors lose some or all principal and the sponsor collects. Triggers can be indemnity, based on actual losses, industry loss indices, or parametric, wind speed or magnitude at a location, with parametric offering speed at the cost of basis risk. Yields float above government bonds by a spread set at issue, and the asset class draws hedge funds, pensions, and dedicated funds because catastrophe risk has little correlation with financial markets. The market holds tens of billions outstanding, growing after every repricing event alongside private collateralized reinsurance, and structures have spread to cyber, mortality, and pandemic risks.