Annual aggregate cat bond

An annual aggregate cat bond is a catastrophe bond whose principal is eroded by the sum of losses from several events over the risk period, usually the year. A per-occurrence cat bond waits for the single big loss. An aggregate cat bond adds things up: every qualifying event in the risk period goes onto the counter, and principal starts to erode once the running total crosses the annual attachment point. Two settings make the whole bond. First, the per-event deductible: only events whose loss exceeds a floor, sometimes a few tens of millions, count toward the aggregate, which leaves the frequency losses with the cedent. Second, the per-event cap, which stops a single catastrophe from burning through the layer by itself and keeps the product an accumulation cover. The cedent is buying protection against the bad year, three mid-size storms or hail that comes back every spring, which its per-occurrence program does not see. The investor carries a risk that is much harder to model. Secondary perils such as severe convective storm, wildfire and flood weigh heavily in an aggregate, and the models clearly underestimated them until the late 2010s. The years 2017 to 2020 eroded a number of aggregate bonds on stacks of events nobody had priced at that level. The market then tightened toward per-occurrence structures, with higher deductibles on the aggregates that remained. The expected loss of an aggregate is read with one eye on the tail of secondary perils. The other stays on the clause that says how losses still developing at the end of the period are carried, often through an extension.