Catastrophe (cat) bonds are one of a number of innovative risk transfer products that have emerged as an alternative to traditional insurance and reinsurance products. Insurers and reinsurers typically issue cat bonds through a special purpose vehicle, a company set up specifically for this purpose. Cat bonds pay high interest rates and diversify an investor's portfolio because natural disasters occur randomly and are not associated with economic factors. Depending on how the cat bond is structured, if losses reach the threshold specified in the bond offering, the investor may lose all or part of the principal or interest.
Catastrophe bond issuance in 2016, at $5.4 billion, was little changed from $5.9 billion in 2015 but about $2.6 billion less than the record high of $8.0 billion in 2014, according to the GC Securities division of MMC Securities Corp. Catastrophe bond risk capital outstanding in 2016 of $22.5 billion was virtually unchanged from $22.4 billion in 2015, and close to the 10-year high of $22.9 billion in 2014.