Catastrophe bonds (also known as cat bonds) are risk-linked securities that transfer a specified set of risks (generally catastrophe and natural disaster risks) from a sponsor to investors. In this way investors take on the risks of a specified catastrophe or event occuring in return for attractive rates of investment. Should a qualifying catastrophe or event occur the investors will lose the principal they invested and the issuer (often insurance or reinsurance companies) will receive that money to cover their losses. nvestors choose to invest in catastrophe bonds because their return is largely uncorrelated with the return on other investments in fixed income or in equities, so cat bonds help investors achieve diversification.
Most catastrophe bonds are issued by special purpose reinsurance companies domiciled in the Cayman Islands, Bermuda, or Ireland.