Do you know about catastrophe bonds? Cat bonds represent a small niche in the financial market, but they have been growing strongly, driven by the effects of climate change. They are bonds that cover insurance claims against natural disasters, such as hurricanes, forest fires, floods or earthquakes, among others.

According to Artemis, a news and analysis firm specializing in the subject, the cat bond market could reach a record level of issuance this year, surpassing last year's record. The market for these instruments is currently estimated at some US$44 billion.

According to Bloomberg, investments in cat bonds were the best performers among alternative investment strategies in 2023. Fermat, the largest fund of this type of instrument, achieved a 20% return last year.

These results combine two main factors. On the one hand, catastrophic events have multiplied as a consequence of climate change, which has strongly increased the demand for financial instruments to cover increasing risks.. Institutions such as the World Bank have also entered this market, in this case to help cover risks in poor countries. The institution has US$1 billion in cat bonds issued and plans to reach US$5 billion in the next five years.

On the other hand, there are advances in scientific modeling that process immense amounts of data to estimate the probabilities of natural disasters and relate them to assets at risk and bond returns. process immense amounts of data to estimate the probabilities of occurrence of natural disasters and relate them to assets at risk and bond returns.. Managers such as Fermat use this type of modeling to design their investment strategies. Other companies, such as Karen Clark & Co, have developed predictive models of climatic events that are combined with information on properties exposed to these risks, and offer consulting services.