Contract with insurance and financial risk
Entity A issues a catastrophe bond to Entity B under which principal, interest payments or both are reduced significantly if a specified triggering event occurs and the triggering event includes a condition that B has suffered a loss.
The contract is an insurance contract because the triggering event includes a condition that B has suffered a loss, and contains an insurance component (with the issuer as policyholder and the holder as the insurer) and a deposit component. A discussion of the separation of these two components is set out at Section 5 below.