FAIR Plans selling cat bonds could give states a new way to transfer risk: NRDC

A recent report published by Natural Resources Defense Council (NRDC) highlights that allowing FAIR plans to sell catastrophe bonds can help provide U.S. states with another avenue to transfer risk, in addition to reinsurance.

As the frequency of natural catastrophe events such as wildfires, floods, and severe storms continues to rise throughout the United States, NRDC has underscored an impending crisis concerning state-established Fair Access to Insurance Requirements (FAIR) plans, which function as a last resort insurance option for certain homeowners.

The report, which is authored by Alfonso Pating, a global financial regulation specialist at NRDC, outlines specific actions that states are recommended to take in order to protect FAIR Plans from being financially devastated by disasters.

These include offering incentives for homeowners to upgrade their properties and reduce risks from wildfires, hailstorms, and high winds.

However, what’s most relevant for us is where the NRDC mentions catastrophe bonds, highlighting that some FAIR Plans use this type of insurance-linked securities (ILS) instrument to protect themselves from the costs of large and unexpected natural catastrophe events like hurricanes and earthquakes.

The latest FAIR Plan to participate in the catastrophe bond market is the Texas FAIR Plan Association (TFPA), which successfully priced its debut cat bond in May of this year, securing the organisation with $200 million in multi-peril reinsurance coverage through a Bluebonnet Re Ltd. (Series 2025-2) issuance.

“Authorizing FAIR Plans to sell cat bonds would provide them with another avenue to transfer risk, in addition to reinsurance,” the report reads.

“This can help FAIR Plans protect against catastrophic risk, lock in multiyear pricing, and access broader capital markets.”

Adding: “Cat bonds generally offer faster, more reliable payouts than reinsurance policies from reinsurers, through transparent triggers, and don’t carry counterparty credit risk. They can help maintain the stability of FAIR Plan balance sheets after disasters, making them a valuable complement to traditional reinsurance policies.”

“Climate change is creating an insurability crisis, and states need to act now before that crisis overwhelms their financial stability,” said Pating.

“As climate-influenced disasters grow in intensity and unpredictability, property insurance will continue to get more expensive and less available. Building resilience and reducing risks are paramount in providing a stable insurance market,” Pating added.