Planet Money: "How Hurricanes Became a Hot Investment"

NPR | December 5, 2025
Hosts: Jeff Guo, Waylon Wong

Episode Overview

This episode dives into the unexpected world where natural disasters—specifically hurricanes—become investment opportunities through the creation and sale of catastrophe bonds (cat bonds). Using Jamaica’s experience with recent devastating hurricanes as a jumping-off point, the hosts trace the origins, mechanics, and rapid growth of these exotic financial instruments. The conversation features how cat bonds are reshaping the insurance industry, benefiting countries at risk, appealing to investors, and even funding disaster relief for global pandemics.

Key Discussion Points & Insights

1. Jamaica’s Big Financial Bet

• [01:52] Fayval Williams, Jamaica's Minister of Finance, visits hurricane-devastated communities.
• Jamaica made an "actual bet" on hurricanes with catastrophe bonds, ensuring funds are available for rebuilding after disasters.
• Fayval Williams: “We are in the belt, the hurricane belt. There isn’t much we can do to change that. But what we can do is to take the steps to ensure that we have access to financing.” ([03:22])

2. Catastrophe Bonds Explained

• [03:58–04:56] The basic mechanics: The country (or insurer) sells bonds to investors. If no disaster strikes, the investors get their money back plus interest. If disaster strikes, the government keeps the money to use for rebuilding.
• Cat bonds shift risk away from insurers to international investors.

3. Origins of the Cat Bond Market

• [06:31–13:27]
  • Karen Clark, a trailblazer in catastrophe modeling, pioneered computer simulations that could predict the cost of disasters.
  • Her models revolutionized the insurance industry, which previously relied on guesswork for reinsurance.
  • The turning point: Hurricane Andrew (1992). Clark’s model predicted losses over $13 billion when the industry expected just $5–7 billion. The actual loss: $15 billion.
  • Karen Clark: “There was not much science underlying those decisions. … Really rule of thumb.” ([09:33])
  • Karen Clark: “That was the turning point. And then the whole industry became believers in the model.” ([13:03])

4. The Rise & Appeal of Cat Bonds for Investors

• [13:42–20:56]
  • Post-Hurricane Andrew, there was a shortage and soaring price of reinsurance.
  • Insurance companies worked directly with investors—bypassing reinsurers—to issue cat bonds.
  • Ethan Powell, an early investor: “Maybe instead of having all chicken eggs. You have one ostrich egg…harder and not breaking in the event that the basket falls.” ([17:34])
  • Cat bonds offer:
    • Diversification, since disaster risk isn’t correlated with financial markets.
    • Higher yields than similarly rated corporate bonds—“2 to 3% more on the yield relative to the corporate rating.” ([19:05], Ethan Powell)
    • Social benefit: “Your capital is playing a role in society.” ([20:56], Ethan Powell)
  • The cat bond market is now worth about $60 billion and is mainstream among pension funds.

5. Cat Bonds Beyond Hurricanes: Pandemic Bonds and More

• [22:47–27:06]
  • Cat bonds have expanded to cover terrorism, cyber attacks, and even pandemics.
  • Michael Bennett, World Bank, spearheaded pandemic bonds to address Ebola risks and, incidentally, COVID-19.
  • Michael Bennett: “People thought, this is an extremely innovative way to use the cat bond market. No one had ever done it before.” ([25:52])
  • The World Bank’s pandemic bond triggered in 2020, funneling hundreds of millions to poor countries for COVID-19 relief.

6. How Cat Bonds Actually Play Out: Jamaica’s Experience

• [27:24–31:19]
  • Jamaica worked with the World Bank to issue its first cat bonds in 2021.
  • Payout conditions are very specific (e.g., storm’s air pressure in precise grid location); not every major storm qualifies.
  • After Hurricane Beryl caused nearly $1B in damage, the bond didn’t trigger, prompting public debate.
  • Fayval Williams: "Just because it didn’t trigger is no reason not to continue to have it. It’s an insurance policy." ([29:50])
  • When extremely severe Hurricane Melissa hit, the cat bond did trigger, providing $150M instantly for rebuilding.
  • Fayval Williams: “Everybody was talking about it…who never knew about a cat bond knew about it.” ([30:55])
  • Fayval Williams: “Behind the dollars are people, real people with lives, who would not have anything else to help them.” ([31:19])

7. The Bigger Economic Picture

• [31:46–end]
  • As cat bonds become more mainstream, they create more competition, potentially lowering the cost of reinsurance and thus insurance for everyone.
  • The evolving cat bond market may be vital as climate risks increase: “As the weather gets more and more chaotic…it's maybe not a bad idea to find more and more ways to share that risk.” ([32:17], Jeff Guo)

Notable Quotes & Memorable Moments

• Karen Clark’s dry humor on her early career:
  “But I do like to remind people I was a child prodigy and started when I was 10. Just so you can. That’s a joke, by the way, Jeff.” ([07:19])

• The skepticism Clark encountered in London:
  “I was a woman coming in, an American woman, and I was seven months pregnant at this time... lugging this 35-pound portable computer.” ([10:42])

• Investor Motivation:
  Ethan Powell: “Cat bond is the lion king of them all… sitting on top of the mountain.” ([18:33])

• World Bank’s carpet commentary:
  Michael Bennett: “At the World Bank…the goal is not to make money. It is to fight poverty.” ([24:11])

• Jamaica’s Min. of Finance on real-world impact:
  “Behind the dollars are people, real people with lives, who would not have anything else to help them.” ([31:19])

Key Timestamps

• 01:52 – Jamaica’s hurricane aftermath and cat bond context
• 06:31 – Karen Clark introduces catastrophe modeling
• 11:04 – Clark’s first encounter at Lloyd’s of London
• 12:10 – Clark’s prediction of Hurricane Andrew
• 13:42 – Industry turns to investors, birth of cat bonds
• 16:38 – Early investor perspective (Ethan Powell)
• 19:34 – Cat bonds go mainstream: pension funds, growth to $60B
• 22:47 – Cat bonds expand: pandemics, World Bank’s innovation
• 27:24 – How Jamaica designed and experienced its cat bonds
• 30:55 – Public awareness of cat bonds after Hurricane Melissa
• 31:46 – Cat bonds’ role in increasing insurance competition and resilience

Conclusion

Through personal stories, industry anecdotes, and real-world financial data, this episode offers an accessible, engaging explanation of how catastrophe bonds work and why they’re suddenly hot among investors and at-risk countries alike. From the birth of the market to its real impact in places like Jamaica—and in unexpected crises like COVID-19—the show demonstrates how finance can be a surprisingly powerful tool for sharing the world’s biggest risks.