Cat bond reset

A reset is the annual, contractually scheduled revision of a multi-year catastrophe note's parameters: attachment point, exhaustion point and sometimes index weightings are recalculated so that expected loss returns to the level agreed at issuance. The problem it solves is exposure drift: the sponsor's portfolio grows and moves geographically, and catastrophe models are updated, so a note whose thresholds stayed frozen for three years would see its expected loss depart from what the investor accepted. The reset restores the initial balance each year, by moving thresholds rather than changing price. A variant moves the spread instead of the thresholds, within bounds set at issuance. The mechanism is what makes a multi-year note economically possible, and therefore what distinguishes a cat bond from annual reinsurance: the sponsor locks in three years of capacity without locking in three years of exposure.

A three-year note issued in 2026 attaches at 420 million euros for an expected loss of 1.30 percent. At the 2027 reset, growth in the sponsor's portfolio and a model update would take that expected loss to 1.62 percent: the attachment point is raised to 478 million to bring it back to 1.30. The 5.1 percent spread is unchanged, and the investor keeps exactly the risk it bought.

Cat bond reset, Reset, Réajustement annuel, Variable reset