In many communities at high risk for natural disasters, a Wall Street financing tool that’s gaining popularity, called a catastrophe bond, may make it easier for homeowners to get insurance. On Oak Island, North Carolina, homeowners who face annual hurricane risk are seeing the impacts firsthand.
The interest in catastrophe bonds comes as insured property losses increased from $30 billion in 2015 to over $110 billion in 2024, adjusted for inflation, the Insurance Information Institute found, while homeowner insurance premiums increased 40% faster than inflation between 2017 and 2022, according to the Consumer Federation of America. Many insurance companies have left high-risk markets altogether.
Catastrophe bonds are contingent on whether or not a disaster takes place. Insurance companies sponsor bonds that are then purchased by investors, typically institutional investors. If a natural disaster does not take place, investors get a return on their investment. But if a disaster meeting certain thresholds takes place, money goes to insurance companies to pay out customers’ claims, and investors lose money. Catastrophe bonds are beneficial to insurers because they make large amounts of capital available to pay insurance claims. The bonds are appealing to investors because disasters that lead to insurance payouts are rare.
Catastrophe bonds cover a wide range of disasters, including earthquakes, hurricanes, wildfires, tornadoes and pandemics. But most catastrophe bonds have specific requirements on the degree of disaster before they are “triggered” to pay out to insurance companies. For instance, hurricanes may be required to reach a certain category of intensity, and floods may have to reach a certain height in order for investors to lose money. Many catastrophe bonds also require a certain amount of financial losses before they begin paying out.
On Oak Island, a catastrophe bond sponsored by the North Carolina Insurance Underwriting Association is helping fund insurance and hurricane resilience projects. One such project is for local resident Paige Morgan’s home, installing a fortified roof meant to withstand hurricanes and other extreme weather.
“If you’re not prepared for something like this, you’re taking a huge risk,” she told CBS News. “I’ve seen families lose their whole house, everything in it, with these last few storms”.
Using catastrophe bonds to fund weather resilience upgrades is a new model for the industry. Gina Hardy, CEO of NCIUA, added a provision to her company’s bond so that when investors profit, some of their proceeds go toward funding weather resilience upgrades like those on Morgan’s home.
“When you put on a fortified roof, it reduces your probability of loss by 62%, so the more fortified roofs that we can get on, the less claims that we have,” she said.
For NCIUA, catastrophe bonds have become an important part of making sure insurance is affordable to its clients. NCIUA is North Carolina’s insurer of last resort and has sponsored catastrophe bonds since 2009. Their catastrophe bonds have never been triggered, but if there were ever a severe disaster, the funding would be vital.
“If you have a Katrina that happens to hit, or a Cat. Five that hits North Carolina, we need to have enough funding to be able to pay claims, and so we go out to worldwide markets to obtain that funding,” Hardy told CBS News. “Catastrophe bonds are a way to get investors to provide additional protection for the citizens of North Carolina.”
For catastrophe bond investors, choosing bonds and calculating risk for investing has become a science. In April, King Ridge Capital Advisors launched a catastrophe bond exchange-traded fund. The ETF is the first way for the public to invest in catastrophe bonds, which were previously only tradable by institutional investors.
Vijay Manghnani, managing partner at King Ridge Capital Advisors, has a PhD in oceanography and meteorology, and uses his scientific background to help determine which catastrophe bonds fit in King Ridge Capital Advisors’ portfolio.
“When we look at hurricane risk, we are actually studying hurricane risk for the last 150 years. We pull through the data, we build models that not only take all that into account, but actually look forward, we bring in climate change risk to it,” he told CBS News.
If the catastrophe bond triggers fit the firm’s tolerance for risk, they invest.
Catastrophe bonds have performed well in recent years. In 2024, the catastrophe bond market netted a 17% return, according to Swiss Re.
For investors, the main benefit is that catastrophe bond returns are not correlated to the market, and therefore are unaffected by shocks to the economy. That theory was put to the test earlier this year when the White House levied tariffs.
“We launched our ETF on April 1, which was the day before the tariffs were rolled out, and for the month of April, we were one of the few securities that actually made profit,” Manghnani said.
