Drivers of sovereign catastrophe bond issuance: an empirical analysis

Catastrophe bonds have become increasingly popular in recent decades as a means to transfer natural disaster risk to the capital markets. Governments, however, have rarely issued catastrophe bonds. This raises the question why sovereign catastrophe bond issuance is so scarce. This paper explores the characteristics of countries that issue catastrophe bonds using a sample of 151 countries spanning the 2017–2020 period. Roughly 4 percent of countries in the sample issued catastrophe bonds. These countries tend to be highly exposed to natural hazard risk. Using a probit regression model, I show that, in addition to natural hazard exposure, public debt and income also exert a statistically significant impact on the likelihood of a government issuing catastrophe bonds. These results are robust to different specifications and empirical approaches. Simulations show that for an upper middle-income economy with a public debt level of 20 percent, if hazard exposure increases by a one standard deviation from 6.2 to 7.2—corresponding to the difference between Iran and Brazil, for instance—the probability of issuing sovereign catastrophe bonds goes up from 15 to 29 percent.