The Ethical Aspect of Cat Bond Investments
An important, and often overlooked, aspect of cat bonds are the benefits they bring, facilitating increased access to insurance protection against natural catastrophes.
When presenting cat bonds to a Swedish audience, the ethical aspect attracts a lot of interest. The asset class as such enables better insurance protection in exposed areas and provides for a better functioning market, to the benefit of customers. But even more interesting are the solutions developed in later years that extend insurance coverage to developing economies. This possibility has been a long time favorite discussion point in the cat bond business community, and it seems it is finally taking place.
Not least the World Bank has been advocating the use of financial instruments to mitigate the effects of climate change. The Multi Cat framework utilized by Mexico to obtain insurance coverage at a national level against extreme weather conditions is one example. The recently issued bond covering 16 Caribbean nations is another one, perhaps even more interesting as the bonds are actually issued by the World Bank itself.
Recently, the African Risk Capacity, an African Union initiative, announced the ”Extreme Climate Facility”, a cat bond program to covering climate related risks in a number of African countries. The bond program will start in 2016.
These, and other bonds, provide, of course, collaterals and funds for disaster relief if triggered. But, perhaps more important and often overlooked, provide for investments and development by their sheer existence. The countries most exposed to climate risks also belong, generally speaking, to the most underinsured countries in the world. The lack of insurance capacity hampers private investments and thus economic development at large.
The development is also very promising for investors, as it introduces new perils and new regions, which provide for increased diversification possibilities. As a result, Entropics and other fund managers can offer investors a more attractive return profile. This, in turn, will attract even more capital to the asset class and provide additional funding for new bonds.
This should be interesting to anyone interested in economic development and stimulate more debate on how the financial sector can be a positive force in global development efforts.