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 2017, at a record high of $10.3 billion, substantially increased from $5.5 billion in 2016 and was about $2.3 billion more than the previous high of $8.0 billion in 2014, according to the GC Securities division of MMC Securities Corp. Catastrophe bond risk capital outstanding in 2017 of $25.2 billion was slighter higher than $22.5 billion in 2016 and the 10-year high of $22.9 billion in 2014.