People are betting on wildfires. Should they?
The article investigates the growing market for wildfire catastrophe bonds and insurance-linked securities, where investors bet on wildfire events. While these financial instruments can provide funding for disaster recovery, critics argue they may disincentivize prevention efforts and shift costs to the public, raising ethical questions about profiting from climate-driven disasters.
Background
- Wildfire catastrophe bonds (cat bonds) are financial instruments that let investors bet on whether a severe wildfire season will occur. If wildfires stay below a certain threshold, investors earn high returns; if disaster strikes, they lose their principal, and the money goes to utilities or insurers.
- This article focuses on the growing use of cat bonds by U.S. electric utilities (especially Pacific Gas & Electric / PG&E) to cover wildfire liability. PG&E was driven into bankruptcy in 2019 after its equipment sparked the Camp Fire, which killed 85 people.
- The practice turns wildfire risk into a tradeable asset, raising concerns about moral hazard: if utilities can offload liability to Wall Street, do they have less incentive to invest in prevention (e.g., burying power lines, shutting off power during high winds)?
- A parallel worry is that cat bond markets can become opaque and mispriced, potentially creating hidden systemic risk — echoes of what happened with mortgage-backed securities before the 2008 financial crisis.