The Pacific Palisades neighbourhood, situated between the Santa Monica mountains and the Pacific Ocean, had one of the most expensive real estate markets in Los Angeles. These properties were also extremely hard to insure because of the risk of wildfires. The surrounding region had dry vegetation that was ideal kindling after the hottest summer on record. The seasonal Santa Ana winds spread flames rapidly. Luxury properties were built into the hills off the Pacific Coast highway, often on secluded roads that are hard to access in an emergency.
In July 2024, insurance company State Farm revoked 1,600 existing policies. Many residents now don’t know where they stand. The LA wildfires are unusual in that affluent neighbourhoods have been most affected. The effects of climate destruction normally skew towards poorer communities. Forty per cent of people in the United States are now living in areas at high risk of property damage and destruction from climate change.
Climate change has become uninsurable – at least by typical parameters. That’s where catastrophe bonds come in. The “cat bond”, as it’s known, is a speculative financial instrument for managing unmanageable risk. Traditional insurers will offset this risk in their portfolios – from a natural disaster or cataclysmic event – to agents known as reinsurers (companies that provide insurance to insurers. Then there are retrocessionaires, who provide insurance to reinsurers. Thankfully the process stops here.) Insurance companies will increasingly rely on these reinsurers to help pay for disasters like the Californian wildfires, which some estimate could cost as much as $275 billion. Ireland currently serves as a domicile for some of these special purpose reinsurers.
In the 1990s insurers in Florida were bankrupted by damage from Hurricane Andrew. Afterwards it was nearly impossible for Florida residents to get home insurance. Traditional insurance models collapsed in the face of a systemic risk they were unable to absorb. Catastrophe bonds were born. The bond is a bet on a cataclysmic event like a storm, typhoon or hurricane that causes devastating damage to property. And in doing so they package the unworkable risk of climate change into a speculative instrument.
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If the event happens the bond is triggered and a payout is made. If it doesn’t the issuer gets their initial investment back – with interest. But how this “happening” is measured for the purposes of a payout is Byzantine in its complexity.
In developed countries measuring involves a threshold of on-the-ground damage. In underdeveloped nations, however, where cat bonds are often the main insurance against climate catastrophe, it’s less straightforward. These are places such as the Caribbean, Latin American countries and parts of Africa, victims of protracted colonisation and financial domination, facing significant climate risk and unable to afford insurance premiums. The IMF and the World Bank now recommends catastrophe bonds as the insurance solution to climate change adaptation for such nations. Here a bond is triggered not by estimated damage, which takes time to assess and remunerate, but through meteorological data.
In 2021 Jamaica purchased a cat bond through the World Banks’s capital-at-risk programme. In 2024 the country was hit by Hurricane Beryl as it swept towards the Cayman Islands. Despite doing widespread damage barometric readings were 9 millibars off the level needed to trigger the payout. Investors made a killing from Beryl.
A similar story occurred in 2014 when Storm Odile struck Mexico, causing an estimated $1.22 billion damage. Pressure readings were hampered by the storm itself; some weather stations had even been barricaded to protect them from damage. The definitive reading of 943.1 millibars was taken by Josh Morgerman, an amateur storm chaser from West Hollywood, just shy of the 930 millibar reading (air pressure drops as a hurricane approaches; a lower reading in the eye of the storm is an indication of its strength) necessary for a $50 million payout. In a letter to the LA Times, Morgerman likened it to using temperature readings to trigger a fire-insurance claim. “Who cares how hot it was? The house burned down.”
There is already speculation that cat bond holders will mostly dodge their losses on the LA wildfires.
The catastrophe bond trades in states of exception, but where climate change is concerned, the exceptional is now the norm. And there are markets for this perpetual state of disaster capitalism.
Go to Polymarket, a kind of futures market for betting on, well, futures, and you can stake any dystopia you believe may soon be reality. Buyers can purchase shares in how likely it is that 2025 will be the hottest year on record, whether a nuclear weapon will detonate soon and if the doomsday clock, a man-made indicator of how close we are to self-destruction, will move closer to midnight.
The ashes haven’t settled, but the LA fires show that traditional insurance is over because catastrophe is always coming.
But are markets really the best tool for dealing with a crisis that affects us all but which costs vulnerable communities so much more? In What Money Can’t Buy, Michael Sandel explores the moral conundrum of selling “goods” such as superior healthcare, organs, and the right to pollute – which is to say, he debates the morality of turning these things into an economic good in the first place. Is it okay, for example, to purchase a “viatical” – a share in a life insurance policy that yields a profit when the claimant dies? In the late1990s, as the Aids pandemic shifted from a fatal disease that governments were unwilling to account for to a chronic illness, some survivors got calls from brokers who had bought their policies for a killing, asking why they weren’t dead yet.
Through the lens of trading instruments the cat bond or the viatical is just another bet. It doesn’t matter if it wagers on death, global pandemic or environmental catastrophe.
“Market think” is so invisible it can feel pervasive, even natural. But I’d call it perverse. This market turns shared disaster into a profitable bet. Instead of recognising our collective fate in the climate crisis it offsets risk on to the most vulnerable, when the cost was never theirs to assume.
Rachel O’Dwyer is a writer and lecturer in digital cultures in the National College of Art and Design, Dublin