Catastrophe bonds are issued to transfer risk to investors and provide which feature to the primary insurer?

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Catastrophe bonds transfer risk to investors and provide access to capital markets for the primary insurer. By issuing a cat bond, the insurer raises funds from investors in the capital markets that can be used to pay claims after a specified catastrophe. If no trigger occurs, investors receive their principal back at maturity along with interest. If a trigger occurs, the principal (or part of it) is used to cover claims, reducing the insurer’s losses and helping maintain solvency after a large event. This external funding source complements reserves and reinsurance, giving the insurer liquidity and capital relief when catastrophes hit. It does not guarantee profits to the insurer, and there is still risk to investors; costs aren’t guaranteed to be lower for the insurer. The primary benefit is access to capital markets to fund catastrophe exposure.