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prearranged, pre-loss event cost of capital. 36They may consist of debt or equityinfusion. 37Insurance derivatives are also instruments that are directly linked to a catastrophicevent. 38A derivative is a financial contract with value derived from something else,typically the value of an asset like a stock or an index or market reference. 39Basically,a derivative is a bet on the occurrence or nonoccurrence of a future event. 40Derivatives can be tailored to a specific risk transfer and can be structured aroundthings such as temperature, precipitation, stream flow, and wind. 41Another alternative risk transfer mechanism is insurance securitization. Insurancesecuritization converts an asset that is on an issuer’s balance sheet into a bondobligation. 42In response to catastrophes in the 1990s, this securitization technique wasused to create catastrophe bonds that securitized a catastrophic risk. An insurancesecuritization is basically a secured structured note providing for a collateralizedreinsurance obligation. 43The insurer typically cedes all or a portion of the premium to aspecial purpose reinsurance vehicle, which is usually established offshore in the36 Id. at 5.37 Id.38 Id.39 Id.40 Id.41 Id.42 Id.43 Id.March 5, 2015 14 @ 3-5-2015 ALFA International6427256.3/SP/00009/0099/011215