Catastrophe bonds (also called "cat bonds" or “act of god bonds”) are bonds issued against the possibility of a catastrophe. They have been issued since 1994.
Generally, bonds are issued by insurance companies, and reinsurance companies in particular.
The bonds are designed to provide insurance companies with the financing necessary to cover damages caused by natural disasters.
As long as no catastrophes strike within the bond term, investors receive their money back along with generous returns.
If a natural disaster does hit, investors may lose all of the assets they’ve invested in catastrophe bonds.
That makes catastrophe bonds a high-risk investment based on pure speculation. But yield rates are also relatively high.