The market for catastrophe bonds (cat bonds) established itself in Switzerland a good 20 years ago, and it was precisely at that time that François Divet, now Head of the Insurance Linked Securities (ILS) at Axa Investment Managers Alternatives (AxaIM Alts), first came into contact with this instrument.

At the time, however, he was still «on the other side», working for the insurance company Axa on the design of its first ever cat bond. In 2008, he switched to the investment side. «We are mainly invested, on behalf of our clients, in cat bonds because, unlike private ILS instruments, they are also considered liquid investments for regulatory purposes,» Divet explains in an interview with finews.ch in Zurich. He also knows another important group of market players well, having worked for Scor, France's largest reinsurance company, before joining Axa.

Mr Divet, an ecosystem for cat bonds has developed in Switzerland. (Re)insurers issue the bonds via special purpose vehicles, while asset managers offer fund solutions to institutional and private investors. Is this also the case in France?

The Swiss market is also important for us, as we have a number of clients here, particularly pension funds. Many insurance companies are represented in Zurich, acting as issuers or sponsors. In addition, there are reinsurers who compete with the market with their traditional business, but are also active as sponsors – and, of course, many asset managers specialising in ILS. The scene in Paris is smaller, and for regulatory reasons there are hardly any pension funds among the investors. When a new transaction is presented to investors on a road show in Europe, London and Zurich are the obvious choices, followed by Paris.

Can you summarise the business model as follows: insurance risks from hurricanes and earthquakes in the US are packaged into a cat bond, which is then sold to investors in Europe?

Yes, that's roughly correct. However, there are also quite a few US investors active in this business. There are also securitisations that relate to natural disasters in Europe. However, the US remains the dominant market, and the dollar is therefore the reference currency.

Is it broadly correct to say that there have been no major loss events in the past 20 years and that investors in cat bonds have therefore hardly been asked to pay out?

There have been some serious events during this period, such as Hurricane Katrina in 2005, the earthquake and tsunami in Japan in 2011, various hurricanes in 2017 and forest fires in 2025. However, these did not affect cat bonds because they only contain senior tranches of a securitisation. However, other ILS instruments were affected, such as junior tranches traded on private markets, which were used to cover losses. It should be noted that cat bonds relate almost exclusively to hurricanes and earthquakes, while other ILS also cover for example forest fires and winter storms. Cat bonds are better structured and less risky, so the returns are slightly lower.

«Serious events in the last 20 Jahre did not affect cat bonds because they only contain senior tranches of a securitisation.»

What would be the worst-case scenario for the market?

A huge event of historic proportions, such as the 1926 hurricane in Miami or the 1906 earthquake in San Francisco. This would affect several cat bonds at the same time. However, there are different definitions of triggers. Some triggers relate to the amount of actual damage caused by a single event, while others relate to the cumulative damage caused by several events. Other triggers are defined parametrically, i.e. they depend on the strength of an earthquake, for example.

How is climate change changing the market? Can investors expect higher risk premiums?

Our time horizon for cat bonds corresponds to the average investment period of three years. In contrast, the forecasts of the International Panel on Climate Change (IPCC) refer to 2050 or even 2100. The IPCC assumes that the frequency of hurricanes will not increase, but that they will become stronger. We use internal and external software models for our forecasts, which we are constantly refining.

The interdependencies are tricky, for example, assessing whether the soil is becoming drier, which would increase the risk of fires. And to answer your second question: no, we do not expect risk premiums to increase. The main driver of the market continues to be population growth and the associated potential for damage in vulnerable regions such as California and Florida.

«The main driver of the markets continues to be population growth and the associated potential for damage in vulnerable regions such as California and Florida.»

Isn't there a risk of negative selection, i.e. that reinsurers pass on the bad risks to the market and keep the good ones?

No, that's not how this market works. All policies are outsourced, and insurers have no selection options.

The main argument in favour of ILS, including cat bonds, is their low correlation with other asset classes combined with decent single-digit returns. Are there other reasons for ILS?

The low correlation is indeed the key element, which has been impressively confirmed in the coronavirus and Ukraine crises, but also in the Liberation Day episode. And over the last 20 years, it has generated respectable returns. I would also add limited volatility to the advantages of this asset class.

Interest rate movements are crucial for bonds. How do cat bonds react to them?

They are structured as floating-rate securities, known as floaters, and therefore have virtually no interest rate risk. Higher interest rates would therefore actually be good for investors.