Terrorism cat bond
A catastrophe bond triggered by a terrorist attack, through which a pool or an insurer transfers part of its political violence exposure to investors.
Capital markets long treated terrorism as uninsurable: it has no stable frequency, it is chosen by an adversary who adapts, and its worst scenarios, nuclear, radiological, biological or chemical, have almost no loss history. The public reinsurance pools set up after major attacks therefore carry this risk with the government as the backstop. A terrorism cat bond lets them place a slice of it with investors, protecting the pool's own funds before the public guarantee is called. The trigger is usually indemnity based, on the pool's losses, and the definition of an act of terrorism follows the statute that founds the program. For investors the central question is modeling: it rests on attack scenarios rather than a statistical series.
In February 2019, Pool Re, the UK terrorism reinsurer, placed 75 million pounds over three years through Baltic PCC, the first cat bond dedicated solely to terrorism and the first issued under the UK insurance special purpose vehicle regime. The name refers to the IRA bombing of the Baltic Exchange on April 10, 1992, which preceded the pool's creation.
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