What is the full form of CAT

Catastrophe Bonds, Act of God Bonds, Catastrophe Bonds, Catastrophe Bonds.

1. Term: Most common or most widespread form of insurance-linked securities for securitizing risks from natural catastrophe exposures (e.g. storms or earthquakes) in property insurance. Cat bonds are also used in other areas, such as in life insurance to securitize risks from extreme mortality.

2. methodology: Cat bonds are issued by companies, direct insurers or reinsurers (sponsors) via a special purpose vehicle. The underlying risk of the transaction is transferred to the subscriber of the bond (investor). The investor buys a security whose interest and repayment are linked to the occurrence of an event (or several events) defined in the bond contract (e.g. storm in Germany, earthquake in Japan). Because the investor pays potential liability in advance, cat bonds are a fully collateralized form of cover. For the invested capital, the investor receives a base rate (usually a money market fund rate). He also receives a risk premium for assuming the risk of loss in the event of a defined event that triggers the cat bond (trigger, damage trigger). The proceeds from the issue or the capital generated by the issue is managed by a trustee (commercial bank) commissioned by the special purpose vehicle and invested in bonds with a high credit rating (e.g. government bonds) to secure the risk evidenced in the bond. The possible amount of loss for the investor depends on the individual structuring of the cat bond. Usually the capital of the investors is reduced according to the payments made by the special purpose vehicle to the sponsor. After a partial loss, the base rate and the risk premium are paid (only) on the remaining capital.

3. Types: A distinction is made between what are known as a) Indemnity cat bonds: they are linked to the individual damage suffered by the sponsor.
b) Non-indemnity cat bonds: the payments are based on objective quantifications of damage that are not specifically related to the sponsor. These quantifications of damage can have different characteristics. Often, geological or meteorological parameters are defined as the event that triggers damage payment (parametric triggers) for the cat bond (so-called parametric cat bonds). In the case of so-called index-based cat bonds, certain industry-wide loss indices (index or market loss triggers) can also determine the point at which the cat bond is used. In the case of a so-called modeled loss cat bond, the compensation payments are determined by modeling an event loss (so-called modeled loss trigger) for a previously defined reference portfolio.

4. Features: In addition to a special purpose vehicle for processing the transaction, the definition of the triggering event as a reference value is an important element when structuring a cat bond. The closer the reference value (trigger) is based on the sponsor's actual portfolio, the lower the basic risk. An individualization of the cover and thus a reduction of the basic risk are offset by the requirements of standardization and transparency to reduce the structuring effort on the part of the investors.

5. Goals: The use of cat bonds enables new capacities to be built up outside of the traditional reinsurance market, especially for peak risks. Due to the fact that the investors provide the (risk coverage) capital immediately upon issue and subscription of the cat bonds, the credit risk for the beneficiaries (sponsors) can be reduced considerably. The individual structuring makes it possible to design the cover flexibly (e.g. for several years). The low or nonexistent correlation to other financial market risks enables investors to make a positive contribution to the risk-return profile of their portfolio.