“Cat” bonds are debt instruments that transfer risk for specifically named catastrophic events (earthquakes, cyclones, etc.) from one party (typically the government or an insurance company) to the investors who buy the bonds. Payment of the bonds is only triggered if the particular event(s) designated in the instrument occur.
While insurance can be a fully commercial instrument, it can often be prohibitively expensive if the risk it is intended to cover is perceived as too high too costly, or too difficult to diversify through a portfolio approach. To this end, premium support for policy holders and/or partial guarantees for insurers can be useful means of increasing the availability of these types of mechanisms.