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As defined by the National Association of Insurance Commissioners, catastrophe bonds (commonly abbreviated to cat bonds) are a segment of the insurance-linked securities market. They are used by P&C insurers and reinsurers to transfer major risks on their books (such as for hurricanes, windstorms and earthquakes) to capital market investors, reducing their overall reinsurance costs while freeing up capital to underwrite new insurance business. Payment of interest or principal to the reporting insurance company depends on the occurrence of a catastrophe event of a defined magnitude or one that causes an aggregate insurance loss in excess of a stipulated amount.

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