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 correlated with other economic risk. 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 2018 dipped slightly to $9.1 billion from 2017’s record high of $10.3 billion, according to the GC Securities division of MMC Securities Corp. Catastrophe bond risk capital outstanding in 2018 of $28.7 billion surpassed the record high of $25.2 billion in 2017. U.S.-based perils comprised the majority of cat bonds issued in 2018. GC Securities expects the upward trend in issuance to continue in 2019.