Cat bonds have emerged as a socially responsible investment: Man Group

The stable return profile of catastrophe bonds and their historically low correlation with broader financial markets have traditionally been the main reasons investors considered an allocation of cat bonds into their portfolio, however, more recently, investors have started recognising catastrophe bonds for their social impact, as per a new report from the Man Group.

According to the firm, a “new breed” of cat bonds has now emerged, aimed at preventing disaster and extending coverage for low-income countries unable to mobilise proper financing to fight a looming disaster.

The UN reportedly defines resilience as the “ability of a system, community or society exposed to hazards to resist, absorb, accommodate to and recover from the effects of a hazard in a timely and efficient manner.”

The Man Group continued, “The cover that catastrophe insurance provides sits firmly within this definition.

“Not only does it compensate for losses, but the use of parametric triggers can mean that payments are made more quickly than if actual losses had to be assessed (particularly in emerging markets where the claims process is generally less well developed).”

Continuing, “Now, cat bonds are also emerging as a socially responsible investment. For the insured risk, cat bonds provide an element of risk transfer back to investors.”

Man Group highlighted named storm cover for Jamaica, earthquake cover for the Turkish Catastrophe Insurance Pool, and the Pacific Alliance cat bonds as examples which illustrate how these insurance-linked securities (ILS) instruments can aid in building risk transfer resources and disaster resilience.

“As a sign of confidence in this asset class, the market capitalisation is growing at an impressive rate.

“New, innovative bonds are emerging as a very effective tool in providing a new kind of social benefit, while helping generate uncorrelated risk-adjusted returns for investors,” the firm’s report concluded.

Environmental, social and governance (ESG) investing remains a key area of focus for the insurance-linked securities (ILS) market and with the asset class ticking many boxes for a socially responsible mandate, investors are increasingly looking to understand the beneficial features of the cat bond instrument.