Cat Bond Triggers: When & How Your Capital is at Stake

Cat bonds offer retail investors an exciting investment opportunity and often provide the potential for high yields for years at a time. However, we believe one of the most important facets of a cat bond that investors should understand is how and when it pays out. These events are known as triggers or triggering events.

Let’s say a natural disaster does occur. What might this mean for investors in a cat bond? To answer that question, investors will need to understand the different types of trigger mechanisms that might be present in that cat bond: parametric triggers and indemnity triggers. 

Parametric Triggers

Parametric triggers are definitive conditions a peril must meet before a cat bond activates a payout to the sponsor. An example of parametric triggers might be: if a hurricane reaches a certain wind speed, causing a predetermined level of damage in a specific area. Parametric triggers provide immediacy and clarity and can inform cat bond investors immediately if the capital has been called out of the vehicle thus causing the investor losses. 

Parametric triggers can create mismatched basis risk. Bondholders could potentially be “off the hook” when insurers have to absorb significant losses because the storm damage didn’t track against certain coordinates, or insurers could suffer only modest losses while investors lose capital because those certain parameters were met. And regardless if a cat bond is activated or not, they can still experience liquidity and price fluctuations after significant disasters before the total losses derived from the event are fully known.

Indemnity Triggers

Then there are indemnity triggers, which ties cat bond losses directly to that of the insurer or reinsurer. An example of an indemnity trigger might be a cat bond that is triggered if  insurer X’s losses exceed $1.5B; once this threshold is breached, the bond automatically starts to pay out to cover insured losses. Indemnity triggers are commonly used by insurer sponsors, but they lack the certainty and transparency of parametric triggers and can take time to pay out as insurers need months or even years to calculate claims and clearly determine what the cumulative damage is. 

Attachment & Detachment Points

Aside from triggers, it’s also important to understand how attachment and detachment points allocate risk across a cat bond. These points determine when a cat bond begins to absorb losses - something we can liken to a deductible on an insurance policy. 

For example, if a cat bond has an attachment point of $1B, then investors’ principal is safe unless the loss exceeds that amount. An attachment point is the beginning marker for when issuers can begin to capitalize on that bond. On the other hand, a detachment point is the cap at which an investor is no longer responsible - or when the bond’s exposure ends. Using the previous example, if the detachment point is $1.5B, then the cat bond is only vulnerable to losses between $1-1.5B. This middle ground between points is what’s known as the coverage layer.

For investors, understanding attachment and detachment points provides the guardrails of the cat bond and provides visibility into how susceptible that bond might be and what the investor experience might entail should they decide to own that particular issue. For example: low-attachment bonds may offer higher yields but also might be more volatile given the likelihood with which they can be accessed. 

With their different triggers, cat bonds can invite both clarity and uncertainty. We believe that investors should have a basic understanding of cat bond triggers and the language around the vehicle so that they have an understanding of the investment’s risk. As with any investment, owners should have an understanding of if and when their capital is vulnerable. 

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Key Sources

Brookmont Capital Management Research, 2025

Artemis BM 

Actuary.org “Insurance-Linked Securities & Catastrophe Bonds,” 2022

Federal Reserve Bank of Chicago, Chicago Fed Letter, No. 405, 2018: “Catastrophe Bonds: A Primer and Retrospective”