Legal Blog

Legalese Explained: Catastrophe Bond

May 14, 2019

This week’s phrase is catastrophe bond. No, this has nothing to do with the British comedy Catastrophe. I’ve only seen series one and two of Catastrophe. I’m a sucker for British comedy, and I really loved Sharon Horgan in this when I watched the show a few years ago. In writing this post, I learned that there are two more seasons, so guess what I’m adding to the queue – please no spoilers! But, I digress…Back to the purpose of this email, the catastrophe bond. Here’s the legal definition: catastrophe bond.
 
A securitization of a catastrophic hazard, such as an earthquake, hurricane, or windstorm. Repayment of principal and/or coupons is contingent on the occurrence of a defined lossmaking catastrophe; if a specified loss occurs, the issuer of the bond (often an insurer) may delay or cease making payments to investors, effectively transferring the risk exposure to investors. The determination of whether payments are to be suspended under a catastrophe bond is generally based on one of three types of triggers: the indemnity trigger, index trigger, and parametric trigger. Also known as CAT BOND. (Catastrophe Bond, 2019)
 
Essentially, a catastrophe bond is a bond that’s taken out to help alleviate some of the risk an insurer takes on. For instance, in the aftermath of a natural disaster, an insurance company expects that it will have to pay for more claims than normal. This can be detrimental to an insurance company, especially after a major hurricane or earthquake in a heavily populated area. A catastrophe bond is funded by third party investors. It is normally a short-term bond, and the insurance company only gets the funds if there is a disaster. If a disaster occurs, the bond helps the insurance company to pay the claims. If no disaster occurs, the insurance company pays back the principal to the investors.
 

If you have a legal phrase or word you would want to see featured shoot me an email at klongaker@offitkurman.com. 

 

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ABOUT KELCIE LONGAKER

klongaker@offitkurman.com |  301.575.0325   Ms. Longaker’s primary areas of concentration include general corporate advising, administrative hearings, and state and federal appellate litigation. She advises start-ups and small businesses during all stages of the business’s life-cycle. She regularly drafts organizational documents, reviews commercial leases, negotiates franchising agreements, and assists with the sale of corporate entities. Ms. Longaker represents many businesses that require liquor licenses, including restaurants, package goods stores, agricultural producers, and manufacturers. She represents clients before county agencies in their applications for new licenses, transfers of existing licenses, or defense of challenged licenses. She also handles land use and zoning matters, real property transactions, and homeowners’ association matters.







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