Cat bonds are under scrutiny: Catastrophe bonds — also known as cat bonds — which have delivered investors significant returns with an average of 15% last year, are in the spotlight amid claims they are “unfairly benefiting investors at the expense of certain issuers,” Bloomberg reports. The concern about the fairness of these bonds’ terms comes after Jamaica’s cat bond was not paid out despite Hurricane Beryl’s recent devastating impacts.

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REFRESHER- What are cat bonds? Cat bonds are high-yield debt instruments designed to help ins. companies raise money in the event of a natural disaster. They are also frequently used to mitigate the effects of climate change — which can exacerbate and increase the frequency of some natural disasters — by transferring a specified set of risks from a sponsor, typically an ins. company to investors. The USD 47 bn catastrophe bond market was at the heart of the highest-returning hedge fund strategy last year with a 20% value increase.

The basis for scrutiny: The Jamaican government’s USD 150 mn cat bond — arranged by the World Bank — narrowly missed the payout threshold due to specific air pressure parameters, Bloomberg adds. This outcome has sparked debate among Caribbean leaders, who are calling for a review of the triggers that determine payouts. Critics argue that the rigid terms protect investors but expose vulnerable nations to catastrophic risks.

The outlook: The market for catastrophe bonds continues to grow, driven by factors such as climate change and population density. While investors are attracted to the high returns and the chance to diversify their portfolios, the World Bank warns that allowing cat bonds to be paid out more easily would increase their cost. Some countries are reconsidering their use of catastrophe bonds, such as the Philippines who chose not to renew its cat bond in favour of an indemnity insurance program.

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