As the name suggests, catastrophe bonds are not for novice investors. Still, interest in these high-yield, high-risk securities is growing as natural disasters intensify.
First developed for the U.S. market in the 1990s, cat bonds are issued by governments, insurance companies, or reinsurance companies to cover the costs of natural disasters. Investors buy products with the expectation that no payments will be triggered, meaning that they will get their money back and get a return. Or, in the case of a natural disaster caused by the bond, the issuer retains capital to cover the aftermath.
“From an insurer and reinsurance company perspective, cat bonds provide access to an alternative source of funding that is more flexible than balance sheet capital and aimed at absorbing specific types and layers of risk,” said Brandan Holmes, vice president senior credit officer at Moody’s Ratings. “Cat bonds can be more cost-effective than traditional reinsurance,” he told Euronews.
Recent disasters such as Hurricane Melissa in Jamaica have highlighted the attractiveness of these securities. Importantly, as aid spending in rich countries declines, capital markets offer countries an important means of reducing insurance costs. Repeated natural disasters can push governments into debts they cannot repay, especially as the cost of repaying their dues increases.
From an investor’s perspective, this product also has advantages. Bonds not only offer attractive yields due to their high risk, but also provide portfolio diversification due to their limited correlation with financial markets. This means that if stocks and regular bonds decline at the same time (a rare but real scenario), catastrophe bonds offer some protection. “They also tend to have relatively short maturities, giving investors flexibility in their asset allocation decisions,” Holmes said.
complex trigger conditions
The global cat bond market has about $57.9 billion (49.93 billion euros) outstanding, according to data firm Artemis. Despite increasing climate risks, these assets recorded historically high returns in 2023 and 2024, reaching 20% and 17%, respectively.
One factor that boosts returns is that investors only make payments if certain conditions are met. For example, when Hurricane Beryl hit Jamaica last year, the country was not eligible for cat bond compensation because the atmospheric pressure did not fall below a certain threshold. Meanwhile, Jamaica will receive the full amount of $150 million (€129.37 million) thanks to World Bank disaster insurance in the wake of this year’s Hurricane Melissa.
Analysts stress that the complexities surrounding cat bonds make them unsuitable for inexperienced investors. “You have to really understand the transfer of risk,” said Maren Josephs, credit analyst at S&P Global. He added, “What we’ve seen recently is that investors think they’re investing in extreme events, like very large hurricanes or earthquakes. But in recent years, moderate-sized events like tornadoes, wildfires, and floods have been occurring more frequently, so some investors are surprised to lose money in these types of natural disasters.”
Currently, the main buyers of cat bonds are institutional investors. However, there are ways for individual investors to indirectly access this product. Earlier this year, the world’s first exchange-traded fund (ETF) that invests in cat bonds debuted on the New York Stock Exchange. This means fund managers can pool investors’ contributions to buy cat bonds. In the EU, these products are not easily accessible to non-experts, but exposure is possible indirectly through UCITS, a type of mutual fund.
“There’s no way retail investors in the U.S. or the EU can buy the cat bonds that are actually issued,” said Johannes Scharn, an associate at Mayer Brown who advises on bond issuance. He further said, “Although these are only available to accredited investors, it occasionally happens that mutual funds invest or partially invest in cat bonds.”
ESMA also taken into consideration
Despite the benefits of these securities, their availability within the EU may become more restricted in the coming years. This comes after the European Securities and Markets Authority (ESMA) recommended in its report to the European Commission this summer that cat bonds should not be included in UCITS. The market watchdog has clarified that UCITS should only hold small indirect exposures of up to 10% to these financial instruments.
ESMA’s recommendations have sparked debate over the risk of cat bonds for non-professional investors, but Kian Navid, ESMA’s senior policy officer for investment management, told Euronews that the advice sent to the European Commission does not constitute a value judgment for the investment. “ESMA’s technical advice does not take a position against retail investors accessing cat bonds per se. This advice does not outline what is a good or bad investment, but does provide data and risk analysis for the Commission’s consideration,” he explained. “Conceptually, however, opening up UCITS beyond 10% to alternative assets (such as cat bonds) risks blurring the lines between UCITS and alternative investment funds (AIFs).”
The European Commission’s decision is still pending and will include a public consultation and further market analysis in 2026. Still, it remains to be seen whether catastrophe bonds will appeal to European tastes.
“This is an established product in the U.S. market, but less so in Europe,” said Patrick Scholl, partner at Mayer Brown. “I don’t know if there are a lot of interested investors here… but if we see more catastrophe developments in the region, we might see more of these products in Europe.”