Investigating the links between CAT bond and capital markets with European natural catastrophes

The European area has experienced severe climate-related natural hazards over the past decades. The amount of economic losses caused in the region by extreme climate-related events is estimated at EUR 738 billion during the period from 1980 to 2023, with over EUR 162 billion amounted between 2021 and 2023 (EEA 2025). Much of these losses are attributable to the low-pressure system "Bernd" that affected Central Europe from the 12th to 15th of July 2021, causing heavy rainfall that led to catastrophic flooding in western Germany, Luxembourg, Belgium and the Netherlands. At the height of the event, rainfall was almost double the maximum value measured historically, associated with a return period of over 200-400 years. Reinsurance markets were significantly impacted. Reinsurers moved to a reassessment of risk, which led to more restricted coverage and though renewals for primary insurers.As climate change continues increasing the frequency and severity of extreme natural catastrophe events, insurance and reinsurance coverage are likely to become more expensive and less accessible. Relevant players in the insurance sector have thereby addressed the need for promoting synergies between reinsurance and financial markets, as a means to expand reinsurance capacity by leveraging capital from investors (IMF 2022; EIOPA 2024). Structured products such as catastrophe (CAT) bonds have been developed in financial markets offering protection against low-probability and high-severity climate-related events. CAT bonds are high-yield and highly-risky debt instruments that transfer risk to investors in exchange of a sufficiently high risk premium. The institutional framework of CAT bonds reflects a structural evolution from the traditional three-tier system, comprising insurance, reinsurance, and state intervention, to a four-tier model where capital markets accept to absorb tail risk. The pricing of CAT bonds is based on estimations of exceedance probabilities and expected natural catastrophe losses. The values of exceedance probabilities, expected losses, risk spreads, and notional amounts estimated at issuance for actual CAT bond deals are available in open access platforms such as Artemis (www.artemis.bm). Data on catastrophe climate-related events are also publicly available through platforms such as Copernicus (climate.copernicus.eu) and EM-DAT (https://www.emdat.be/).We propose to investigate the links between recorded exceedance probabilities, expected losses and CAT bond spreads with market credit spreads observed in capital markets, and estimated tail probabilities of historical natural catastrophe events. We aim to verify the agreement between CAT bond and reinsurance markets in assessing the premium for natural catastrophe risk. For tis purpose, we propose to apply standard regression analysis to evaluate the risk–return relationship embedded in market CAT bond spreads and exceedance probabilities, and to implement statistical inference with Generalised Extreme Value (GEV) and Generalised Pareto Distributions (GPD) analysis to derive the tail probabilities of historical natural catastrophe events. Finally, we aim to investigate the sensitivity of CAT bond spreads to trends in natural catastrophe risk, and developments in capital markets.