What does a catastrophe bond mean? What is the meaning of natural disaster bonds?

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The translation and meaning of this word is as follows: high-yield debt instruments, generally related to insurance, designed to deal with natural disasters, such as hurricanes or financial needs. There is a special provision whereby the issuer's liability for repayment of principal and interest may be deferred or even waived altogether if the issuer suffers a loss as a result of a scheduled natural disaster.

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Disaster bonds, the term you are talking about, is one of the core vocabulary of CMA, and the meaning of this word is as follows: bonds issued by insurance companies to link the principal and interest of the bonds with the company's losses caused by natural disasters.

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The translation and meaning of this word is as follows: high-yield debt instruments, generally related to insurance, designed to deal with natural disasters, such as hurricanes or ** financial needs. There is a special provision whereby the issuer's liability for repayment of principal and interest may be deferred or even waived altogether if the issuer suffers damage and loss of lead due to a scheduled natural disaster.

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Cat Bonds is an insurance company (or the United States**, Japan**, etc.) that transfers risk to a large number of investors by issuing bonds based on insurance risk, replacing reinsurance companies with investors in the capital market.

There are generally two types of cat bonds: A-1 and A-2

In the case of A-2, the investor's principal is completely exposed to the risk, for example, once the risk occurs, the investor's principal cannot be recovered, so they bear the original risk such as **;

A-1, the investor's principal is protected, only the interest is fully exposed to the risk, and comparatively, if there is no risk, the interest of the A-2 investor is higher than that of the A-1 investor.

In a nutshell, it is.

**Issue a disaster** to the people, in a certain period of time, if a disaster occurs, such as a hurricane, the people's money to buy ** or the **interest that the people should get will be taken**, but if there is no hurricane, then relatively, after the expiration** must give the people who have purchased the principal and interest, and the interest is the profit of the people.

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Bonds issued by insurance companies are designed to link the principal and interest of the bonds to the company's losses caused by natural disasters.

When an insurer's business is affected by an unforeseen natural disaster, an act of natural disaster gives insurers a great deal of flexibility. Because both the principal and interest of a bond are directly linked to losses caused by natural disasters, insurers can alleviate the financial crunch by delaying, reducing or canceling bond repayments.

The compensatory trigger is expressed in terms of its actual loss compensation amount, which was commonly used in the early catastrophe bond market to reduce a company's basis risk, but the process was too complex to require full disclosure of information.

Exponential triggers are represented by a special index, such as the Sector Loss Index and the Parametric Index. It represents the relative level of loss, which in turn reflects the overall situation, which can reduce the loss caused by information asymmetry to the fuji investor, but it is prone to basis risk.

Basis risk refers to the risk that the hedge contains losses that are exposed to the risk that the hedge may behave differently (American Academy of Actuaries, 1999), i.e., the value of the index or basis used or constructed for the settlement of the product may not be exactly the same as the loss required by the insurer.

The reason why catastrophe bonds have been able to develop rapidly in the international market in a relatively short period of time is related to its own advantages.

One of the core concepts of catastrophe bonds is the trigger condition, which is the type of catastrophe risk or the degree of risk volatility that will change the return of investors. Depending on the terms agreed upon at the time of issuance, investors may lose all or part of the interest they would have earned for the remainder of the bond, and may also lose part of their principal.

The damage conditions can generally be divided into two categories, one is a certain level of disaster, such as a certain intensity of **; Another type of concession is a certain amount of post-disaster compensation. There are two types of post-disaster claims, one is directly based on the claims of the insurance company that issued the bonds; The other is based on the industry payout in a specific region.

Catastrophe bonds are a new way to diversify risk, expanding on what was previously only reinsurance. When the agreed condition is that a catastrophe occurs, the insurer may not return the principal (and of course not interest) to the bondholders; However, when a catastrophe does not occur, the insurer has to return the principal and interest to the holder as agreed, and its rate of return is higher than that of other bonds in the market.

Catastrophe bonds are bonds that transfer part of the insurance company's catastrophe risk to bond investors by issuing bonds whose earnings are linked to specified catastrophe losses. In the capital market, there is a need for specialized intermediaries (SPRVS) to ensure that insurers are compensated in a timely manner in the event of a catastrophe, and to ensure that bond investors receive investment returns linked to catastrophe losses. The important condition is conditional payment, the so-called compensatory trigger and index trigger.

Catastrophe bonds refer to the repayment of the principal and interest of the bonds in the future after the public issuance of the bonds, which is completely determined by the occurrence of catastrophe losses. That is, the buyer and the seller issue bonds in the capital market, one party pays the principal of the bond as the underwriting of the bond issuance, and the other party agrees to pay a high amount of bond interest to the other party on time, and according to the occurrence of future catastrophe losses, as the basis for subsequent interest payment and repayment of the bond at the end of the period.

Comparatively speaking, the issuance of catastrophe bonds also has the following disadvantages:

Transaction costs are higher. Transaction costs are high due to the investment banking, full financial guarantees, trust institutions, actuarial and pricing involved in bond transactions.

May affect the stock price. The details of the bond transaction can easily lead to the publication of relevant information, which may affect the share price of the risk-bearing company**.

Low investment leverage. Catastrophe risk investors must provide a 100% guarantee.

The trading relationship only extends to the duration of the contract. Unlike traditional reinsurance ceding and ceding companies, all transactions are terminated during the period, and the relationship between the buyer and seller is terminated at the same time, and there is no follow-up relationship.

Investors are unfamiliar with catastrophe risk. Not all institutional investors are familiar with the reasonable** nature of catastrophe risk, nor do they understand the calculation of property insurance loss compensation, so it cannot be fully popularized by investors in the capital market.