Cat-in-a-Box

A Cat-in-a-Box trigger is a type of parametric trigger, so pays out a pre-defined amount based on specific parameters of an event.

A good example can be seen with protecting oil rigs off the Gulf Coast of the U.S. against the impacts of hurricanes.

Pre-defined parameters such as windspeed, intensity and so on are agreed, and a specified geographical area (box) is established surrounding the oil rig. Should a hurricane pass through the ‘box’ meeting the specified criteria the bond is triggered and claims are payed.

Similar cat-in-a-box structures are also used in high-value coastal areas, particularly in hurricane zones, where drawing a box and defining parameters can provide the trigger mechanism for a risk transfer, insurance or reinsurance arrangement.

This type of parametric trigger mechanism is extremely transparent to investors as it’s based on pre-defined parameters rather than actual claims, although this can result in an unforeseen basis risk for the insurer or reinsurer.

One of the most famous catastrophe bonds of all-time is the Concentric Ltd. transaction from 1999, which provided insurance to the owners of Tokyo Disneyland using a parametric box trigger that featured three concentric circles drawn around the location, with different payout factors applied to each depending on the severity of an earthquake occurring within them.