The risk compensation paid to catastrophe note holders, on top of the collateral's own yield.
The spread on a cat bond is the portion of the coupon that pays for insurance risk, separate from the yield produced by the collateral account's assets. The holder receives the sum of the two, which is why headline yields on catastrophe notes rise mechanically when short rates rise, with no movement in the price of risk. The problem the distinction solves is reading the market: conflating the two components leads to seeing a hardening where only rates have moved, a frequent error in market commentary. The spread is compared to expected loss through the multiple, and its level reflects the balance between available capital and risk on offer, the uncertainty premium on the model, the note's liquidity and its duration. Peak perils and indemnity structures, slower to settle, cost more at equal expected loss, which shows the spread pays not only for probability but also for opacity and for tied-up capital.
A note issued in 2026 pays a total coupon of 8.7 percent, made of 3.1 percent collateral yield and 5.6 percent risk spread, for an expected loss of 1.45 percent, a multiple of 3.9. The following year short rates fall 120 basis points and the spread is unchanged: the headline coupon drops to 7.5 percent while the price of risk has not moved one basis point.
Cat bond spread, Marge de risque ILS, Risk spread, Coupon de risque