Catastrophe Equity Put Option

A put option (basically a contingent capital arrangement) that gives stock insurers the right to sell shares of their stock to investors at pre-negotiated, fixed prices when catastrophe losses exceed the levels specified in the option contract. In return, they receive a commitment fee (premium) from the option’s buyer. As such, the purchaser is given the right to access the seller’s capital when that is direly needed. This provides a contingent source of additional equity in the wake of catastrophe losses.