A catastrophe bond allows an insurer, or another party who issues it, to pass on the financial risk associated with a large insurable event to investors willing to assume it, for a premium. The security pays investors a coupon, like a regular bond, but if a qualifying event occurs, the invested principal is used to cover insured losses.

Cat bonds and other similar insurance-linked securities (ILS) offer an alternative to traditional reinsurance. By selling them to investors, issuers can tap into a wider source of capital.

For the investors, catastrophe bonds present an opportunity to earn a higher rate of return, which is most welcome in today’s low-interest environment. The securities have recently offered yields that were, on average, two percentage points higher than those of corporate bonds. The bonds’ below-investment-grade credit rating, usually “BB”, reflects the risk of loss of principal in case of an insurable event.

While still a small portion of the global reinsurance capital (US$555 billion in Q1 2014, according to Aon Benfield, a global reinsurance broker), the global ILS market has been growing steadily. In September 2014, the total outstanding value of the ILS market was US$22.8 billion, the highest in its short history, according to Artemis.bm.

If the 2014 issuance, already at US$6.4 billion in September, surpasses the 2007 record of US$8.2 billion, the industry will celebrate its record year.