This season, you’ve heard all about Florida’s struggling property insurance market, described by one industry insider as hanging on “by a piece of chewing gum.”

Private insurance companies are losing money in Florida. Some are going bankrupt; others are dialing back their exposure by taking on fewer policies or leaving the market altogether. 

This episode, we dive into possible solutions, starting with reinsurance, which is essentially insurance for insurance companies. Reinsurance is critical to keeping the housing market and the economy afloat. But lately that protection is getting harder and more expensive for Florida insurance companies to buy.

We explore another possible solution, a financial instrument launched in 1996 in the wake of Hurricane Andrew: the catastrophe bond. “Cat bonds,” as they’re called, allow investors to make money on risk by betting against catastrophes. In very simple terms, large institutional investors pay into a fund that insurers can access if a big enough disaster strikes and the bond gets “triggered.” If the wind doesn’t blow, investors can make anywhere from about 4% to more than 10% on their money. But if a big storm or earthquake hits, they can lose their entire principal investment. You can check out cat bond losses here.

Lately, some investors are worried that the catastrophe models that cat bonds rely on aren’t keeping up with the climate crisis and are underpredicting massive storms and catastrophes. 

In the last 14 years, the cumulative amount of capital in the catastrophe bond market has had spurts of extreme growth as well as relatively flat periods, according to data from Guy Carpenter, a reinsurance company.

After two years of multiple destructive hurricanes in the United States and Puerto Rico, the value of bond issuances were nearly cut in half in 2019. In Florida, it was the lowest since 2011. For the last two years there has been some growth, but not at the higher rates seen in the early 2010s.

For more on this, check out our colleagues’ take on APM Research Lab.

Season two of “How We Survive” follows the money to the end of the world. In this case, South Florida. New episodes are out every Wednesday. Be sure to follow us on your favorite podcast app, and tell a friend if you’re enjoying the show.