Investing in disasters: can catastrophe bonds boost SA’s recovery?
By, Aleeshia Naicker – Senior Investment Consultant
Since the mid-1900s, catastrophe bonds have provided rapid financial relief in the face of disasters, while also offering institutional investors attractive yields with a return profile that is uncorrelated to traditional investments.
Despite South Africa’s recent experience of the effects of climate change manifesting in floods, tornadoes, wildfires and more, and traditional insurance and reinsurance markets becoming increasingly stretched by the frequency and severity of these natural disasters, catastrophe bonds remain relatively underdeveloped locally. Against this backdrop, we assess the viability of alternative assets such as catastrophe and parametric bonds, which have been gaining global attention.
The country’s unique combination of climate vulnerability and maturing pension funds positions it well to explore their adoption.
The viability of bonds
Let’s start by understanding what each of these bonds are. Catastrophe bonds or “cat bonds” are a type of insurance-linked security. They allow insurers or governments to transfer the risk of large-scale disasters (like tornadoes, earthquakes or pandemics) to investors. An insurer issues the bond through a special purpose vehicle (SPV). Investors buy the bond, lending money to the issuer.
This gives insurers extra capital when disasters strike, while investors earn high yields if the disaster doesn’t happen.
Parametric bonds pay out when a predefined parameter is triggered. Examples of triggers are rainfall deficits, dam water levels and grid outage hours. Parametric bonds offer fast payout because they don’t rely on the assessment of insurance claims or damages – only assessing whether the parameter is met. While the payout may not perfectly match the actual loss, it gives faster access to liquidity after a disaster to implement fixes.
So, the question is, can these be used in mainstream investing in South Africa?
An almost perfect scene for bonds
South Africa (SA) has exposure to climate and disaster risks, which have been increasing in occurrence in recent years, and traditional insurance markets have come under pressure. This sets an almost perfect scene for cat or parametric bonds to provide additional capital for faster relief and recovery of infrastructure.
SA pension funds are looking for alternative assets with uncorrelated returns. Currently, cat bonds, globally, offer an attractive USD yield of between 10% and 12%, as well as portfolio diversification, especially since payouts aren’t tied to financial market cycles.
Barriers and suitability
However, cat bonds typically need large investor bases. The SA market is smaller than other markets where they are currently being used, so scale might be an issue. One option around this is to structure the bonds regionally. Pooling across the South African Development Community (SADC) region, for example, would spread the risk and offer economies of scale in the cost of setting up the bond. This would also offer investors a regionally diversified product.
Parametric products additionally rely on accurate weather, seismic and hydrological data. Gaps in SA’s climate and catastrophe data infrastructure could be a barrier. Furthermore, cat or parametric bonds are structured via SPVs. SA’s financial regulators would need to provide a clear framework for issuing and investing in these instruments, while investors and issuers would need to clearly understand the risks and rewards involved.
Parametric and catastrophe bonds could become mainstream if supported by regulation, reliable data infrastructure, and regional risk pooling, but we are a long way off from that in SA. These bonds would be especially valuable in industries such as agriculture, given SA’s climate vulnerability.
For now, SA pension funds that are searching for diversification or a hedge against climate change should consult with their advisers about whether a no-more-than 5% allocation to this asset class is suitable for their offshore investments.
At the end of the day, even floods need funding.
13 February 2026
Read the article from FAnews Magazine-Online February 2026 edition