Catastrophe Risk Transfer in a Warming World: Systemic Risk and Performance of Cat Bonds

Climate change is reshaping the global risk landscape, increasing the frequency, severity, and unpredictability of natural disasters. These developments strive growing pressure on the insurance and reinsurance industry, which must absorb escalating claims, reassess underwriting models, and manage the financial consequences of extreme weather events. This thesis examines how the insurance sector adapts to this evolving environment and evaluates the role of market based risk transfer instruments, particularly catastrophe bonds, in strengthening financial resilience under intensifying climate risk. The first part of the thesis establishes a conceptual framework by outlining the scientific and economic dimensions of climate change and documenting its implications for insurers and reinsurers. It then analyzes the structural features of the insurance sector and its potential systemic relevance, highlighting how risk pooling, reinsurance mechanisms, and financial interconnectedness can either transmit or absorb shocks. A dedicated section examines Insurance-Linked Securities (ILS), focusing on catastrophe bonds, their structural design, trigger mechanisms, pricing methodologies, and the evolution of the ILS market. The empirical analysis addresses two complementary research questions. First, whether catastrophe bond issuance affects systemic risk within the insurance sector. Systemic risk is measured using market-based indicators, including the Marginal Expected Shortfall (MES) and a bidirectional ΔCoVaR framework that distinguishes between insurers’ vulnerability to aggregate shocks and their contribution to system-wide tail events. The analysis is extended through a pairwise ΔCoVaR network approach, mapping bilateral tail-risk spillovers among major global insurers and reinsurers. The network structure is further examined using multiple centrality measures, such as eigenvector centrality, Katz centrality, PageRank, and the HITS hub–authority decomposition, to assess the stability of systemic hierarchies across issuance and non-issuance periods. The results consistently indicate that catastrophe bond issuance does not increase insurers’ systemic vulnerability nor amplify spillover transmission within the sector. Network topology and centrality rankings remain stable across regimes, suggesting that securitization of catastrophe risk does not restructure the internal architecture of tail-risk interdependence. Second, the thesis evaluates the profitability and risk-adjusted performance of catastrophe bonds in a climate-stressed environment. The evidence shows that, while cumulative returns remain below global equity benchmarks, catastrophe bonds deliver stable performance, lower volatility, and superior risk-adjusted metrics, confirming their diversification benefits. The findings suggest that catastrophe bonds represent a financially sustainable risk-transfer mechanism that enhances balance-sheet resilience without generating measurable systemic side effects. By integrating climate economics, insurance theory, financial modeling, and network-based systemic risk analysis, this thesis contributes to the understanding of how market-based instruments can support financial stability in an era of escalating climate-related uncertainty.