The market for catastrophe bonds is one of this year’s best-performing debt classes. It’s also about to see a significant increase in sales as the World Bank, a major issuer, prepares to ratchet up its offering.
“I think you’ll see us doing cat bonds beyond hurricanes, pandemics and earthquakes,” to include physical disasters like floods and droughts, Bennett said in an interview. Investors in cat bonds pay the insured party when a contractually defined disaster strikes and specific parameters are met, such as a pre-determined pressure reading during a hurricane. When all the conditions are fulfilled, investors stand to lose some or all their money, which is then used to help cover the cost of the natural disaster in question.
Bennett said the World Bank already has “a couple of transactions in the works,” though he declined to provide details. Investors in cat bonds get access to portfolio diversification because their price movements are uncorrelated to those of stocks or other fixed-income instruments. And they’re useful for filling environmental, social and governance mandates from end investors.
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