Catastrophe Bonds: Read the Fine Print
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1. An insurer sells cat bonds to institutional investors. The bonds only trigger for specific events within a set time frame.
2. The insurer pays the bondholders an interest rate, and if no disaster occurs, bondholders get the full value of the bond returned.
3. If a disaster occurs and the conditions are met, the insurer keeps the money.
4. In Japan's case, most of the bonds were set to pay out only if a quake hit near Tokyo. The insurers won't get the capital boost they wanted from the bonds.
Data: Bloomberg