Sales of catastrophe bonds, or cat bonds, are currently skyrocketing as insurers grapple with the rising costs of climate-induced extreme events. In the first half of 2024 alone, insurers raised a record $15.4 billion through these risk-transfer instruments. As the costs of climate disasters rise, cat bonds allow insurers to offload their risks to capital market investors. This helps to maintain insurance availability and affordability in the long term. But while cat bonds offer quick liquidity and attract sustainable investors with high returns, they may be missing a crucial piece of the puzzle: true climate preparedness.
Last year was the hottest ever recorded. Climate-fuelled disasters, like the Valencia floods and the Los Angeles wildfires, are becoming more frequent and severe. In the EU, the agricultural sector is particularly facing climate change challenges, with losses projected to reach €40 billion per year by 2050. A recent report by the European Commission and the European Investment Bank (EIB), titled Insurance and Risk Management Tools for Agriculture in the EU, reveals that extreme weather events cause an estimated €28 billion in average yearly losses to the EU agricultural sector, with farmers shouldering approximately 70–80% of the damages. As only 20-30% of losses are insured, the report calls for closing that insurance protection gap by scaling up financial mechanisms, including cat bonds. In this context, the role of parametric insurance in supporting EU agricultural resilience is particularly in focus.
In contrast to indemnity cat bonds, which are paid out based on actual losses incurred by the insurer or reinsurer, parametric bonds pay out based on predefined, measurable parameters, such as wind speed during a hurricane, the magnitude of an earthquake, rainfall levels, or drought levels, and do not require proof of actual loss. This enables fast disbursement and is particularly suitable in regions with limited insurance infrastructure or slow claims processing.
While cat bonds offer a vital financial safety net, they are inherently reactive tools that help communities and insurers recover after disasters; however, they do not prevent those disasters from occurring in the first place. This reveals a critical gap: Cat bonds are effective in managing risk, but they fall short of driving real climate preparedness or adaptation on their own. Critics warn that an overreliance on financial risk transfer, like cat bonds, could lead to complacency. If insurers and governments feel shielded from financial losses, they may be less incentivised to invest in mitigation or adaptation strategies such as emissions reductions, resilient infrastructure, or early warning systems. In this light, cat bonds could unintentionally reinforce the status quo rather than encourage forward-looking climate action.
To prevent this, we must rethink how we talk about disasters themselves. There is no such thing as a “natural disaster”, only natural hazards. Whether a hazard becomes a disaster depends on human decisions: how exposed, vulnerable, or resilient a community is. As the UN Human Rights Council has affirmed, disasters result from a failure to reduce vulnerability and enhance resilience. This framing shifts the conversation from response to responsibility, underlining the urgent need for proactive investment in risk reduction and adaptation.
Globally, there is a $360 billion annual gap in financing for climate adaptation, which undermines the ability of countries and communities, especially in vulnerable regions, to prepare for the future. Cat bonds, if properly designed, can help fill this gap.
One example is parametric cat bonds linked to climate adaptation goals or green rebuilding, which are innovative instruments that could be structured so that payouts are not only triggered by extreme weather conditions but are also tied to how the funds are used, for example, rebuilding infrastructure to be more resilient, restoring ecosystems, or supporting rapid disaster response. Because parametric bonds disburse funds quickly, they can enable governments or communities to “build back better” in real time, accelerating recovery while fostering long-term resilience.
In the EU, for instance, where agriculture is both economically vital and acutely exposed to climate volatility, such innovative financial instruments can be vital for safeguarding livelihoods and food security. Imagine a parametric cat bond for agriculture in Southern Europe. If soil moisture levels fall below a set threshold for more than 30 days during the growing season, the bond could trigger an immediate payout. Those funds wouldn’t just rebuild damaged crops, but they could also support the rollout of water-saving irrigation systems, the distribution of drought-resilient seeds, and training for regenerative farming techniques. In this way, the bond becomes a tool not just for recovery, but for adaptation.
As climate shocks grow more frequent and severe, cat bonds must evolve beyond risk transfer to actively reduce vulnerability. In the EU agricultural sector, particularly, these instruments can play a vital role in strengthening resilience. When designed to support rapid recovery and incentivise long-term adaptation, such as resilient infrastructure or sustainable farming practices, cat bonds become more than a financial buffer; they become tools for building a more prepared, adaptive, and climate-resilient future.
