FRM Part 1, Book 3, Chapter 2, Insurance and Pension Plans| PrepVisuals by Braia Renata #frm

FRM Part 1 Book 3 Chapter 2 Insurance and Pension Plans | Property & Casualty Risk & CAT Bonds Explained

In this FRM Part 1 lesson, we break down property and casualty insurance (P&C), focusing on different types of exposures—including cars, equipment, and people—and key risk events such as accidents, death, legal liability, and natural disasters.

A critical concept for the FRM exam is that natural disaster risk is non-diversifiable, meaning it cannot be reduced through pooling. This is where catastrophe bonds (CAT bonds) come in. These are high-yield bonds where the principal is at risk if a disaster occurs. They are widely used by insurers to transfer extreme risks to investors, and historically, they have attracted strong demand.

From an exam perspective, understanding how to interpret CAT bonds is essential. In this lesson, we walk through a practical example with three bonds (A, B, and C), each with $20 million principal and different coverage layers (40–60, 60–80, 80–100). You’ll learn how to identify when the principal is fully lost, partially lost, or unaffected, which is a common FRM exam question type.

This is a highly testable topic and mastering it can give you a strong edge on exam day.

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The visuals, voice, and narration are the original content of Braia Renata, CPA, CFA, FRM.

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