Jeff Guo

Yeah, the Cat Bond stands alone.

So diversification is one reason why investors like Ethan put money into Cat Bonds.

But another big reason is that Cat Bonds are also kind of lucrative.

So in finance terms, 2 to 3 percent, that's a lot.

For investors, cat bonds are kind of becoming mainstream.

You're seeing huge public pension systems buying them up, which means the interest from cat bonds is helping to fund the retirement of, like, school teachers in Arkansas and public employees in Virginia.

So right now in Florida, for instance, hundreds of thousands of people can only get their home insurance through the state.

Florida runs this nonprofit insurance company called Citizens that insures some of the riskiest homes in Florida because they have to.

And while Citizens used to buy a lot of traditional hurricane reinsurance from places like Lloyd's, now it gets most of its hurricane coverage through cat bonds because they can get a better deal from investors.

Ethan says at least what money he loses on cat bonds will go toward rebuilding people's homes.

Cat bonds actually have this kind of do-goodery reputation in the finance world.

And it almost sounds too good to be true, right?

Like, cat bond investors are supposedly making these big profits, but also they are helping people rebuild in the wake of a catastrophe.

Here at Planet Money, there's a thing that we like to say, okay, that I like to say, which is that humanity's greatest invention is insurance.

Think about it.

Insurance is basically a technology to transfer risk from one person to another, from one place to another, from me to my insurance company, from my insurance company to a reinsurance company.

Catastrophe bonds are kind of the next evolution of that.

They let insurance companies take some of the risks they're facing, the risk of a giant hurricane or earthquake, and transfer those risks onto a crowd of investors around the world.

Yeah, I mean, why not even a cat bond for a worldwide pandemic?

Michael Bennett works on these kinds of creative financial ideas at the World Bank.