Climate Change and Cat Bonds
Climate change caused by human activity is a major challenge for humanity. Coping with climate change calls for powerful efforts and considerable changes in everyday life to limit the effects.
Insurance-linked securities (ILS), of which liquid cat bonds are a subsector, can give important contributions to a more resilient society by strengthening the financial protection against natural catastrophes and by pricing risks. As the global demand for insurance increases following increasing wealth and a higher frequency of extreme weather events, the need for innovative financial solutions to improve financial resilience increases.
In the short term, ILS management is not particularly affected by climate change. The maturity of a cat bond is, in the respect, short (typically 3-5 years), whereas climate change is a process taking place over considerably longer periods. Hence, in the short term natural annual weather variation is more important than climate change.
Entropics also adjusts the analysis for annual variation by considering the sea surface temperature in the Atlantic and by using models based on the latest scientific findings.
As a responsible company, Entropics strives to contribute to smaller emissions of greenhouse gases. In our investment activity, we thus exclude instruments specifically offering alternative insurance capacity for, among other purposes, fossil fuel extraction. We also publicly act to increase the awareness of the importance of the insurance market to protect people against climate change and for investors to demand responsible investments in alternative asset classes.