Right now, as Hurricane Irene nears the end of its lumbering trip up the East Coast of the U.S., someone is making money. At the same time, other people are losing money — not in property damage or lost income from a closed business, but because they lost a bet against nature. They had bet that a major hurricane would not in fact occur (or would not occur and cause x amount of damage). The mechanism is what’s known as a “cat bond,” or catastrophe bond.

Here’s how it works. An insurance company sells a cat bond to an investor. The bond has a condition: if some predetermined natural disaster occurs — perhaps a hurricane hitting New York — the principle, what the investor/gambler paid for the bond, is lost. The insurance company keeps the money. If it doesn’t happen, the investor wins, and gets an extraordinarily high interest rate in return.

For the investor/gambler it’s simply a risky bet. For the insurance company, it’s a form of reinsurance. That is, if the disaster happens and the insurance company has to pay out a ton of money to its customers, winning its own bet on mother nature softens the blow of paying for a bunch of washed away, insured beachfront homes.

In 2007, The New York Times Magazine published a story on a hedge fund manager named John Seo, a leading light in the world of cat bonds. The piece explains the odd predicament or even contradiction that selling catastrophe insurance entails.....