The Rise of Catastrophe Bonds

In 1992, a devastating hurricane caused insurance companies huge losses, leading to bankruptcies. To protect themselves, insurance firms introduced catastrophe bonds in 1997, which are used to provide financial support in the event of catastrophic events, such as earthquakes or floods, relieving insurance companies from repaying bondholders. Despite the initial market skepticism, the issuance of cat bonds soared after a massive 2005 hurricane, and in 2023, the market for catastrophe bonds in the US outperformed regular bonds and hedge funds. The increasing frequency of natural disasters due to climate change has prompted insurers to issue a record-high 16.4 billion dollars worth of cat bonds, offering high returns to investors due to the perceived risks involved.