A high-yield, asset-based debt security that is issued by an insurance company with principal, interest, or both linked to the company’s losses arising from a natural calamity such as an earthquakes, fires, hurricanes, floods, etc. Such a bond may have treasury bonds as underlying asset or reinsurance premiums as underlying income stream. Insurance companies issue these bonds, which are usually backed by insurance premiums, in order to raise funds to insure themselves against potential adverse events whereby it might be obligated to make hefty payouts to the insured.

The bondholder receives payments out of collected insurance premiums. However, if losses exceeded a specific level, interest payments and/or principal payback would be either delayed or relaxed. In this sense, these bonds create flexibility for insurance companies if an unforeseen disaster occurs, compromising its ability to pay insurance as stated in insurance policies.

Catastrophe bonds are also referred to as CAT bonds, or Act of God bonds.