Chapter 08 · Finance, data & evidenceSustainable Finance & Investment
Catastrophe bond
Definition
An insurance-linked security through which a sponsor (insurer, reinsurer, government or agency) transfers specified catastrophe risk — hurricanes, earthquakes, floods — to capital-market investors. Investors receive enhanced coupons; if a triggering event occurs during the risk period (typically about three years), principal is diverted to pay the sponsor's claims, partially or fully.
References
ILS definition; cat bonds transferring catastrophe risk to capital markets; investor principal funding claims.
Collateralised principal, coupons, ~3-year maturities; trigger typology; diversification rationale.
Overview
What it means
Cat bonds convert insurance risk into a tradeable asset class attractive for its low correlation with financial markets. Structures park investor principal in safe collateral while paying floating-rate coupons; triggers vary in basis risk: indemnity (sponsor's actual losses), industry-loss indices, parametric (event metrics like wind speed or earthquake magnitude), and modelled-loss.
The market has grown from hurricane risk into pandemic, wildfire and cyber, and is increasingly used for sovereign and development-finance resilience — the World Bank and Mexico's FONDEN have issued cat bonds, and the structure now features in climate-adaptation finance discussions as pre-arranged disaster funding.
How it is used
Reinsurers (Munich Re, Swiss Re) structure and place ILS; institutional investors (dedicated ILS funds, pension funds) hold them for diversification; governments use them for disaster risk financing alongside contingency funds and parametric insurance.
Why it matters
Cat bonds are the flagship of risk transfer for a climate-disrupted world — putting capital-market capacity behind disaster resilience, and testing how societies pre-finance escalating extreme-weather losses.