A Catastrophe Bond (aka cat bond) is an Insurance-Linked Security (ILS) developed by the Property & Casualty (P&C) insurance industry during the 1990s in the aftermath of Hurricane Andrew in Florida and the Northridge earthquake in California. These financial instruments were seen as a way to protect the P&C insurance and reinsurance markets from catastrophic losses by transferring risk exposures to investors in the capital markets. The primary ILS instrument developed for this purpose was the catastrophe bond. The catastrophe bond market is concentrated around property risks with underlying exposures to U.S. perils, including hurricanes, earthquakes and windstorms.

Catastrophe bonds are similar to traditional bonds where an issuer borrows a principal amount from investors and repays the principal plus a specified amount of interest at maturity. Catastrophe bonds can be issued as public offerings or private placements, and can trade in secondary markets. The distinguishing feature of catastrophe bonds is the investor requirement to forgive some or all payments of interest or principal if a specified triggering event occurs. The triggering event can be defined in various ways, but typically reflects a situation where the issuing insurer experiences catastrophic losses. If no triggering event occurs, the bond principal and accrued interest is returned to the investor at maturity.