Embedding disaster resiliency terms into catastrophe bonds and other insurance-linked securities (ILS) products could potentially unlock billions of dollars in funding for adaptation and risk reduction measures, according to Alissa Legenza, Member of the UNDRR Investor Advisory Board.
The United Nations Office for Disaster Risk Reduction’s (UNDRR) Investor Advisory Board (IAB) was established in response to growing calls from governments to engage the private sector in scaling up investment in disaster risk reduction.
The IAB’s goal is to mobilise both public and private capital to prevent disasters and strengthen societal resilience. The Board also works to develop tools and methodologies that help turn investor commitments into practical action, supporting progress toward the Sendai Framework and the Sustainable Development Goals (SDGs).
“Currently, there is approximately USD 115 billion of private investor capital in the insurance linked securities market. However, the market has historically lacked a sufficient link connecting insurance-linked securities to disaster resiliency adaptation efforts,” Legenza said in a recent analysis.
“If disaster resiliency terms can be more prominently featured in cat bonds and other insurance linked securities products, then there is potential for billions more in funding to be unlocked for the advancement of adaptation and risk reduction measures.”
With traditional insurance often limited in scope and sometimes slow to pay out, catastrophe bonds have emerged as a critical financial tool for delivering immediate liquidity in the wake of disasters.
As our readers are aware, these instruments, which are favoured for their structural flexibility and parametric triggers, enable rapid deployment of funds to governments and communities, helping to reduce the economic shock of natural catastrophe events.
But their role, Legenza argues, can go further.
“Cat bonds can go beyond only providing immediate financial relief post-disaster by integrating features to encourage proactive disaster resiliency and sustainable recovery,” Legenza said.
“One key innovation that can be included in cat bond structures is the ability to incentivize issuers to invest in resilient infrastructure and adaptation measures before disasters strike. These features can be embedded in the bond terms, rewarding issuers for implementing risk mitigation strategies that reduce potential losses,” Legenza continued.
Of course, cat bonds can go beyond providing immediate financial relief post-disaster by integrating features that encourage proactive disaster resiliency and sustainable recovery.
A cat bond could also include resiliency triggers that link coupon payments to specific infrastructure improvements or disaster prevention measures.
Issuers, such as governments or municipalities, could receive financial incentives, like reduced insurance premium payments, if they invest in flood defenses, upgrade building codes, or strengthen emergency response systems.
“Conversely, if resiliency criteria are not achieved as anticipated, the bond coupon rate could increase, providing cat bond investors with a higher return as compensation for the issuer’s failure to mitigate risks. This approach ensures that not only is disaster insurance protection in place, but tangible actions are also taken to minimize future risk exposure,” Legenza added.
“Catastrophe bonds provide an innovative and flexible solution for disaster resiliency financing, offering immediate liquidity, diversification for investors, and a mechanism for incentivizing proactive disaster risk management,” Legenza further explains.
Concluding: “The incorporation of resiliency-linked features can further enhance the value of cat bonds by encouraging issuers to invest in longterm infrastructure improvements to mitigate future disaster risks. As climate risks continue to escalate, the development of catastrophe bonds with integrated resiliency and SDG-aligned features will be critical in building global financial resilience while supporting broader societal and environmental objectives.”
Legenza’s perspective highlights the evolving role of ILS in not only providing post-disaster liquidity but also actively promoting pre-disaster risk mitigation.
As the ILS market matures and investor interest continues to grow, embedding resiliency-linked features in cat bond structures could prove a pivotal step in aligning capital markets with climate adaptation goals.
