Tokenized Catastrophe Bonds Could Help Address the Disaster-Insurance Gap

Preface

Natural disasters create substantial financial losses, yet insurance often covers only a portion of the damage. The gap leaves households, businesses and governments responsible for costs that can be difficult to absorb. Catastrophe bonds, or cat bonds, offer insurers a way to transfer defined disaster risks to capital-market investors. The market has grown, but access has traditionally been concentrated among specialist funds and large institutions. Harneys and dropRWA plan to issue tokenized cat bonds in early 2027, exploring whether digital ownership records and smaller interests could widen participation. Tokenization may change how investors access these instruments, but it does not remove the underlying disaster risk or the need for regulation. This article explains the insurance shortfall, how cat bonds work, the proposed tokenized structure and the practical limits of the approach.

Lazy bag

Catastrophe bonds transfer specific disaster risks from insurers to investors, providing capital if a defined event occurs. The market had $65.6 billion outstanding in June, while disaster losses remain heavily uninsured in some regions: in the Asia-Pacific, 91% of disaster losses in 2023 were uninsured, according to the OECD. Harneys and dropRWA plan to issue tokenized bonds in early 2027. Smaller ownership units could potentially broaden investor access, but tokenization does not guarantee lower premiums, eliminate catastrophic losses or exempt offerings from securities, insurance and investor-protection rules.

Main Body

Natural disasters caused $220 billion in economic losses last year, while insurance covered $107 billion, according to Swiss Re. The difference represents a substantial protection gap. Households, businesses and governments must bear costs that fall outside insurance coverage, whether because policies are unavailable, unaffordable, limited in scope or difficult to obtain in high-risk locations. The consequences can include prolonged recovery, pressure on public budgets and greater financial uncertainty for communities and companies.

Catastrophe bonds are one way insurers and other risk sponsors seek additional financial capacity. Commonly called cat bonds, these instruments transfer a specified portion of disaster risk to investors. A bond’s terms define the covered risk and the conditions under which investor capital may be used to meet losses. If the triggering event occurs and the contract’s conditions are met, some or all of the principal may be applied to the sponsor’s claims or other covered obligations. If the specified event does not occur during the bond’s term, investors may receive the agreed return and repayment according to the bond’s terms. The exact structure and triggers vary by transaction.

For an insurer, a cat bond can provide a source of capital-market protection against events such as hurricanes, wildfires or earthquakes. For investors, it offers exposure to an insurance risk whose performance is tied to defined disaster conditions. This does not make the instrument risk-free: a severe event can result in losses of principal. Nor is a cat bond simply a bet that a disaster will or will not happen. It is a structured transfer of a defined risk, with legal terms governing the sponsor’s protection and the investor’s exposure.

The market has continued to attract capital. Catastrophe bonds had $65.6 billion outstanding in June, and new issuance reached $11.3 billion in the second quarter, the largest quarterly total on record, according to Artemis’ recent cat bond report. These figures show the scale of activity and the willingness of investors to provide capacity for disaster risks. However, market growth does not mean that all exposed households and businesses have adequate coverage. Cat bonds are one component of a larger insurance and reinsurance system, and their availability does not automatically translate into policies for every vulnerable community.

The protection gap is especially visible in the Asia-Pacific region. The Organization for Economic Co-operation and Development (OECD) reported that 91% of disaster losses in the Asia-Pacific in 2023 were uninsured. Floods, typhoons and wildfires can cause extensive damage, but coverage may be difficult to arrange in areas where the expected risk is high. Insurers and reinsurers need reliable information to estimate the likelihood and potential cost of claims. The OECD has noted that limited claims data and catastrophe models can make it more difficult to price coverage, particularly in high-risk areas. When uncertainty is high, providers may restrict coverage, charge more or decline to insure particular risks.

Against this backdrop, Harneys, a Bermuda-based law firm specializing in global insurance, and tokenization platform dropRWA plan to issue tokenized cat bonds in early 2027. Under the proposed approach, each token would represent legal ownership of the catastrophe bond. The firms are considering a structure that could accommodate smaller beneficial interests, potentially allowing participation at a lower unit size than conventional offerings. The proposal is intended to build on an established insurance-linked securities market, rather than replace the underlying risk-transfer function of a cat bond.

Historically, many catastrophe-bond offerings have been geared toward specialist funds and large institutions. Minimum investments can be $250,000 or more, which limits access for investors who cannot commit that amount or meet other eligibility requirements. Dividing ownership into smaller interests could change the size of a position an investor can hold. But smaller units alone do not determine who may invest. A tokenized bond would still need to follow applicable securities, insurance and investor-protection rules, and its offering documents and distribution arrangements would need to reflect the relevant legal requirements.

Henry Tucker, chief executive of specialist insurance group Hearns, emphasized that tokenization should not be confused with making disaster coverage a casual retail investment. The capital is committed to cover a defined insurance risk. “You’re not buying a right to get paid by somebody else who’s bet the other way at the casino,” he told CoinDesk in an interview. His distinction points to the role of underwriting: a specialist assesses the risk, sets out the terms and determines the capital needed for the specified protection. Investors, in turn, must understand that their principal is exposed to the defined event and that returns depend on the structure.

Tucker highlighted flood cover and typhoon protection in Southeast Asia as examples of risks that can be difficult to place with conventional reinsurers, particularly when claims data is limited or loss estimates are uncertain. A specialist underwriter could use a tokenized structure to raise capital for a single defined risk. The transaction could spell out its assumptions and the return offered to investors, giving participants a way to evaluate the terms. Yet transparent terms cannot eliminate uncertainty in modelling a rare or severe event. Actual losses can differ from estimates, and a token does not improve the physical resilience of buildings or communities by itself.

There is also a public-sector precedent for using catastrophe bonds to finance disaster protection. The World Bank arranged $200 million of hurricane coverage for Jamaica in May, replacing an earlier transaction that paid out after Hurricane Melissa in 2025. Jamaica’s finance minister, Fayval Williams, described catastrophe bonds as “an important piece ensuring capital market access” for the country’s resilience strategy. The example illustrates how these instruments can support a government’s financial planning by arranging resources for a defined risk before a disaster occurs. It also shows that cat bonds are not limited to private insurers, although each transaction has its own sponsor, conditions and purpose.

Tokenization may offer operational and access-related changes, but the limits are important. It will not make a hurricane, flood or wildfire less expensive, Tucker said. Nor will it guarantee cheaper insurance for people living in exposed areas. The proposed benefit is narrower: a token serving as the legal ownership record, combined with smaller ownership units, could potentially bring more investors into a market designed to absorb extreme losses. Whether that additional participation results in more insurance capacity, broader coverage or lower costs will depend on transaction design, investor demand, underwriting and the wider insurance market.

Assessment of tokenized cat bonds therefore requires attention to both the financial instrument and the technology used to record ownership. Investors need to understand the bond’s trigger, covered peril, term, potential principal loss, fees and redemption conditions. They also need clarity on how legal ownership is established and how rights are enforced. Sponsors and intermediaries must address compliance and investor protections, rather than treating tokenization as a substitute for them. Regulators’ requirements and the details of each offering will shape who can participate and how the product can be distributed.

Ultimately, catastrophe bonds address one part of a wider challenge: finding enough capital to support insurance against increasingly costly disasters. Tokenized structures could make ownership more divisible and potentially broaden access beyond the traditional institutional market. Their impact, however, will depend on whether they can mobilize additional suitable capital while maintaining clear legal rights, robust risk disclosure and appropriate safeguards. The central question is not simply whether a bond can be tokenized, but whether a well-structured instrument can help close the gap between disaster losses and available protection without obscuring the risks investors assume.

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