Source: Fortune Magazine, Ricardo Makyn—AFP via Getty Images
BY Greg Ritchie, Gautam Naik and Bloomberg
August 18, 2024
A strategy that’s delivered specialist investors huge returns is now facing scrutiny, amid concerns that its risk-reward dynamics might be skewed against some issuers.
Catastrophe bonds, which are issued by insurers, reinsurers and governments seeking an extra layer of disaster coverage, have been handing investors double-digit returns. Issuers, meanwhile, have seen their costs soar.
Grievances surfaced in July, after it emerged that Jamaica’s catastrophe bond wasn’t triggered by the devastation wrought by hurricane Beryl. Though the entire Caribbean island was officially declared a disaster area, the carefully calibrated terms of the bond meant its holders were shielded from losses. In the event, it was decided that the precise level of air pressure required for a payout wasn’t achieved.
For cat bond investors — who are currently reaping an average return of around 15% after raking in 20% in 2023 — the outcome in Jamaica underpins the appeal of a strategy that’s attracted some of the brightest minds in finance. For others, it’s set off a difficult debate.
Caribbean heads of government within the group known as Caricom recently discussed the financial ramifications of Beryl. This month, the group said it will be seeking “an examination” of cat bonds and other insurance-linked securities, and wants the region’s finance ministers to take a closer look at which markets governments should choose and which they should avoid.
“We recognize that at the end of the day, investors need to make returns,” Jwala Rambarran, a former governor of the central bank of Trinidad and Tobago, said in an interview. “But at the same time, fairness and equity says it can’t be all the time that the investors are making the returns. It’s a one-way street.”
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Read the full Fortune article here.