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catastrophe bond is a type of insurance-related investment that helps insurance companies manage the risk of large-scale natural disasters. When investors buy
catastrophe bonds, they are essentially lending money to insurance companies. If a predefined catastrophe, such as a hurricane or earthquake, occurs and causes a certain level of damage, the insurance company uses the funds from the bonds to cover their losses instead of paying out claims from their own funds. This allows insurance companies to transfer some of their risk to investors and potentially reduce their financial burden during catastrophic events.
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