From Climate Extremes to Financial Resilience: E3CI-Based Catastrophe Bond

The HuT (The Human-Tech Nexus) project, funded by Horizon Europe initiative, is focused on risk assessment and disaster risk reduction for distinct types of hazards (wildfires, landslide, droughts, etc.), over the European territory, by means of a series of demonstrators representing a multi-hazard arena. In the framework of this project, we present an innovative Catastrophe Bond (Cat Bond) designed to enhance disaster risk reduction strategies. Cat Bonds are a key financial instrument for transferring the risk of extreme events from insurers to capital markets, thereby increasing resilience and reducing the economic impact of disasters. Our approach lies in the use of the recently developed E3CI (European Extreme Events Climate Index) as the trigger mechanism for the bond. The E3CI is a suite of indicators designed to monitor and quantify the occurrence and intensity of climate extremes across Europe. It integrates multiple variables into a single, scientifically robust metric, enabling consistent and transparent assessment of climate-related risks. By using E3CI as the trigger for our Cat Bond, we ensure that payouts are based on objective, observed climate conditions rather than loss estimates, improving reliability and fairness in risk transfer mechanisms. The coupon here reckoned for the Cat Bond are based on hypothetical portfolios over the Italian territory. The proposed Cat Bond ensures transparency, objectivity, and a strong link to observed climate extremes. This solution represents an interesting case study in integrating climate science into risk financing solutions, supporting both insurers and communities in managing the growing risks associated with climate change.