A catastrophe bond is designed to raise money in the event of a major catastrophe, which is usually defined as an earthquake, hurricane, or windstorm. If the bond issuer suffers a loss from such a pre-defined catastrophe, then its obligation to repay theinterest or principal is either deferred or cancelled. Some "cat" bonds are indemnity-based, which means that they pay out based on actual claims stemming from the catastrophe; these bonds are considered more risky for bond purchasers, since a wide variety of claims may be brought.
Another type of cat bond is based on parametric data, so it only pays out if precise physical measurements of the actual event occur, such as wind speeds or earthquake magnitudes exceeding a threshold level.
This type of bond can be attractive to certain investors that want to diversify their risk away from market-linked risks.