Cat Bonds: No disaster!

Article by Dr. Rebekka Haller

The recent hurricanes “Milton” and “Helene” have brought the importance of catastrophe bonds into the public eye. At the end of September, Hurricane Helene devastated large parts of the south-east of the USA and claimed 230 lives, making it the deadliest storm to hit the US mainland since Hurricane Katrina in 2005. It was followed just a few days later by Hurricane Milton, which temporarily developed from a tropical storm into a category five hurricane.

Even though “Milton” ultimately caused less damage than feared, the insurance industry could be faced with losses of up to 100 billion dollars. “Milton” could thus become one of the most expensive hurri-canes to date. Hurricane Katrina, which devastated the USA, particularly New Orleans, in 2005, remains at the top of this inglorious ranking. Insured losses at the time amounted to 99.8 billion dollars, while total economic losses reached as much as 201 billion dollars.

Such events highlight the need to insure against losses from natural disasters. Catastrophe bonds are a financial instrument that insurance companies use to pass on this risk to the capital market. But can and should investors also invest in cat bonds?