Risk Transformation - Structure And Regulation Of Jersey SPV Issuing Catastrophe Bonds

Background to catastrophe bonds

Bonds may be issued by a company ("SPV") to investors with the purpose of raising capital for the specific purpose of hedging the SPV exposure to a risk of a third party which has been assumed by the SPV.

Historically, bonds which were issued by an SPV to hedge against exposure to the risk of a third party in relation to a natural disaster, became known as catastrophe bonds. This term now refers to a bond issued to hedge against almost any risk assumed in relation to a third party, including credit default risk.

The assumption of risk by the SPV to the third party may be in the form of an insurance, reinsurance or other contract entered into with the third party. The SPV usually pays a high rate of return to catastrophe bondholders, mainly funded by the premium received on the contract with the third party. However, in the event of the catastrophe occurring, the bondholders typically lose their money and the capital of the bonds is