The catastrophe bond (cat bond) market demonstrated strong performance and resilience throughout 2024, with spreads remaining significantly elevated above historical levels, according to insights from Twelve Capital.
Double-digit returns, including collateral yields, attracted investor interest, while the asset class maintained its uncorrelated nature relative to traditional financial markets. The Swiss Re Cat Bond index has delivered a return exceeding 40% over the past 24 months.
Secondary perils, such as severe thunderstorms and floods, were the primary drivers of insured losses in 2024, surpassing losses from traditional peak perils like hurricanes and earthquakes.
Twelve Capital attributed this shift to the growing impact of climate change, which is amplifying smaller, high-frequency catastrophes. These events are increasingly straining global insurance markets and underscoring the importance of diversified risk transfer mechanisms.
Despite an above-average Atlantic hurricane season, cat bond impairments were minimal in 2024. Twelve Capital noted that favorable outcomes were supported by storms avoiding densely populated regions and the structural resilience of cat bonds, which are typically positioned in senior risk layers.
These factors have reinforced investor confidence and fueled continued capital inflows into the market.
Cat bond issuance reached record levels in 2024, with an estimated full-year total of US$18 billion. This growth was driven by repeat issuers and new cedants seeking alternative risk transfer solutions.
The market is also exploring emerging risks, including cyber and parametric solutions. Twelve Capital highlighted that while cyber cat bonds remain in the early stages of development due to modeling challenges, their emergence reflects evolving reinsurance needs.
Looking ahead, Twelve Capital anticipates that robust investor demand could lead to a gradual tightening of spreads. At the same time, structural challenges such as climate volatility, protection gaps, and demographic changes are expected to sustain demand for innovative risk transfer solutions.
Cat bonds, with their capacity to address gaps in re/insurance coverage and mitigate the effects of extreme weather events, remain a critical component of the risk transfer market.
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