Category: Reinsurance brokers and structures · Reviewed by Chrissie Anderson, Client Executive · Last reviewed 2026-06-05
A catastrophe bond (cat bond) is an insurance-linked security under which an investor’s principal is at risk to defined catastrophic events. The bond proceeds are held in trust as collateral for the sponsor’s reinsurance recovery; in the event of a qualifying loss the principal is debited to satisfy the recovery, with the remaining principal returned to investors at maturity.
Category: Reinsurance brokers and structures Also known as: cat bond, CAT bond Related concepts: insurance-linked securities, sidecar reinsurance, collateralised reinsurance
A cat bond is issued by a special purpose vehicle (typically domiciled in Bermuda, Cayman Islands or under the UK Risk Transformation Regulations 2017). The SPV uses the bond proceeds to enter into a fully collateralised reinsurance contract with the sponsoring cedant or reinsurer. The proceeds are invested in highly rated short-duration securities (typically US Treasury money market funds) for the term of the bond (commonly three to five years).
Investors receive periodic coupons (typically a US Treasury benchmark plus a risk spread of 4–10 per cent or more, depending on the modelled loss probability). At maturity, investors receive the residual principal — full if no qualifying events, partial or zero if qualifying events have occurred.
Cat bonds are most commonly issued for property catastrophe risk (US wind, US earthquake, European wind, Japan typhoon/earthquake) but have been issued for other perils (longevity, mortality, terrorism, cyber).
Cat bond SPVs are regulated as insurance special purpose vehicles under the Risk Transformation Regulations 2017 [1] (UK) or under equivalent offshore frameworks. The bond itself is a transferable security listed on the Bermuda Stock Exchange or other ILS-friendly listing venues. Bond documentation includes the offering circular, indenture, trust agreement and reinsurance contract.
The cat bond market grew from approximately $8bn outstanding in 2007 to over $45bn outstanding in 2024 (Artemis cat bond market data), reflecting institutional investor appetite for non-correlated insurance returns and sponsors’ desire for collateralised cover.
Cat bonds are typically structured with triggers based on: indemnity (sponsor’s actual losses); industry loss (an estimate of total insured losses from PCS or PERILS); parametric (e.g. wind speed, earthquake magnitude); or modelled loss (a portfolio modelled against a defined event set). Indemnity triggers are the most common but introduce basis risk for investors.
An illustrative example: a major US insurer issues a $400m catastrophe bond covering Atlantic named storm and US earthquake risk. The bond has a three-year term, pays Treasury + 5.5 per cent annually, and triggers on the sponsor’s gross losses from defined events exceeding $1.5bn (indemnity trigger). Investors include institutional investors, hedge funds and pension funds. No qualifying event occurs during the term; investors receive full principal repayment at maturity.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
Apex Insurance Brokers Limited. Authorised and regulated by the Financial Conduct Authority, FRN 724952. Registered in England and Wales, Companies House 07014570. This entry provides general information about UK insurance concepts and is not regulated advice. Consult your insurance broker on your specific position.
Apex Insurance Brokers serves UK professional services firms and commercial businesses. Call 0117 325 0027, email hello@apexinsurancebrokers.co.uk, or request a quotation.
Get a quote