The role of catastrophe bonds in paying to rebuild after fires and other disasters.

I'm David Brancaccio. In Southern California, officials say about 88,000 people remain under orders to stay away from their homes, given the fires still burning and especially high winds in the forecast today.

A UCLA study finds fossil-fuel-driven climate change is contributing to these fires being hotter and larger and a teachable moment now

on what are called catastrophe bonds, financial instruments issued by insurance and reinsurance firms

and sometimes governments to help cover losses in a disaster, they help keep

insurance markets functioning at a time when it's harder for homeowners to get coverage.

Marketplaces Amy Scott reports.

The catastrophe bond market has been booming with a new high of more than $17 billion in bonds

issued last year, an average returns of around 14 percent.

Yes, investors have done fairly well over the last couple of years.

Chris Grimes follows the CAD bond market at Fitch ratings.

He says the way catastrophe bonds work, an insurance company only gets the money if a specific

type of catastrophe happens and losses exceed a certain threshold.

If that doesn't happen, investors get their money back plus interest.

And though there were plenty of disasters in 2024, winter storms, flooding, hurricanes.

The types of risks that are insured by cap bonds tend to be

fairly risk remote, meaning that a very large event typically would need to happen to trigger losses

to investors. A large event like the L.A. fires? Not necessarily. Robert Hartwig is a professor

of finance, risk management, and insurance at the University of South Carolina. He says of the $50 billion in catastrophe bonds outstanding globally.

Approximately 12 percent of that has exposure to wildfires. And a lot of that is in bonds that cover multiple perils that are only triggered if aggregate

losses reach a certain amount.

But Hartwig points out it's still early in the year.

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