A catastrophe bond — commonly called a cat bond — is a specialised, high-yield insurance-linked security (ILS) issued by insurance or reinsurance companies to transfer the financial risk of large-scale, catastrophic natural disaster events — such as earthquakes, hurricanes, floods, or pandemics — to capital market investors. In a cat bond structure, investors provide upfront capital to a special purpose vehicle (SPV) that invests it in safe assets and pays investors regular coupon payments (premium). If a defined catastrophic trigger event occurs — based on parametric triggers (e.g., wind speed thresholds), indemnity triggers (actual insured losses), or industry index triggers — the principal is used to compensate the insurer and investors lose part or all of their capital. If no trigger event occurs, investors receive full principal repayment at maturity with attractive yields. For fixed income investors globally, cat bonds offer diversification benefits due to their low correlation with traditional financial market returns. As climate risk investing grows in relevance for Indian institutional investors tracking global markets through Ventura Securities, understanding cat bonds is increasingly important.
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