Generally held by large investment funds, catastrophe bonds — more familiarly known as cat bonds — were created to offset the risk of natural disasters on insurance companies. The upside to cat bonds is based on the likelihood that a catastrophe will occur, such as a one-in-100-year event versus a one-in-five-year event. If the disaster doesn’t occur, investors are paid a sizeable return; if it does, the insurance companies can use some or all of the principal to cover the resulting losses. Retail investors typically haven’t been involved in cat bonds, but a recently-launched fund — the GAM Star Cat Bond fund, managed by a company that has a portfolio of upwards of 40 cat bonds — allows investors to gain access to the market for an investment of $10,000.
