The global cat bond market continues to grow, currently exceeding £31bn in value - around double that of a decade ago. This is according to figures from Morningstar, which notes that growth in the value of the market correlates with the greater frequency of natural disasters.

“This higher risk and potential for individual bonds to experience significant losses means diversification is key when investing in a catastrophe bond strategy. The challenge for this asset class is that despite the years of data on such naturally occurring events, reinsurance companies try to assign reasonable probabilities to the occurrence of a specific event, but they lack any consistent predictability, particularly as climate change introduces additional uncertainties,” said Mara Dobrescu, director of fixed-income research at Morningstar, whose latest report looks at how the market for catastrophe bonds has evolved over its roughly 25-year history.

As of June 2023, its global database included 46 funds focused on catastrophe bonds and/or private insurance-linked securities, at a total of almost £13bn. Funds managed by GAM, Schroders and Twelve Capital take up the lion’s share of assets, something that could raise potential capacity concerns.

On average, funds in the catastrophe bond cohort delivered on their promise of outperforming the broader global bond market and delivering low correlation to most traditional asset classes. However, a majority underperformed the most representative performance yardstick (the Swiss Re Cat Bond index).

The appeal of the cat bond market is its lower correlation to traditional bond and stock markets due to the unpredictable nature of weather-related disasters, and potential for higher returns.

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