Financial Side of Global Warming

Abstract

With the accelerated growth of the disaster bond industry, a steady development a drop in their risk premiums was noted. If this latter pattern is in line with the evolution of the probability of natural catastrophes remains an unanswered mystery. Indeed, a substantial percentage of outstanding risk capital on the market for cat bonds tends to be vulnerable to some climatic conditions. Change-related risk, such as hurricane risk, which is anticipated to be global warming reinforce. This paper discusses the topic above by analyzing the facts of global warming, its impacts on the natural environment, and the drivers of risk premiums for cat bonds. We find that radioactive forcing, i.e. the net insolation consumed by the Planet, drives the warming trend of natural phenomena such as ENSO and Atlantic hurricanes in temperature fluctuations and cycle evolution, increasing their destructive effects. Therefore, in view of the current contributions of human activities to radioactive forcing, i.e. emissions of greenhouse gases, there tend to be a growing trend in the probability of natural disasters. Nevertheless, the latter does not seem to have been appropriately priced in the market for pet bonds so far. In fact, while we find that the decreasing trend in multiple cat bonds is accounted for by the Fed's expansionary monetary stance; we also find evidence of substantial undervaluation of the probability of natural disasters.