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Asset managers specialising in catastrophe bonds are fighting a threat to curb retail access to the fast‑growing market, as surging sales of the bonds give small investors a way to bet on the likelihood of big natural disasters.

Twelve Capital, Fermat Capital and Plenum Investments are among the investment managers that had urged Europe’s financial markets watchdog, the European Securities and Markets Authority, to support keeping “cat” bonds in funds available to the broader public.

But earlier this summer, Esma advised the European Commission to exclude cat bonds from the EU’s largest retail fund regime — setting up a broader fight over whether the investments carry too much risk.

“Esma is trying to solve a problem which doesn’t exist,” said Daniel Grieger of Plenum, which manages about $1.3bn of cat bonds. The regulator was standing in the way of efforts to expand ordinary savers’ access to higher- yielding markets and “attract more capital to Europe’s real economy”, he said.

At issue are concerns over the complexity and tradeability of cat bonds, which have grown from a niche instrument bought by specialists to an asset class with more than $55bn of value outstanding, according to data provider Artemis.

Insurers, governments and other issuers use catastrophe bonds to cut their exposure to the most extreme risks they face, such as a large hurricane or wildfire. As insurance companies’ liabilities have increased because of inflation and climate change, they have increasingly paid capital markets investors — along with traditional reinsurers such as Munich Re and Swiss Re — to shoulder some of the risk.

In exchange, bondholders have been rewarded in recent years with higher returns than other fixed-income investments such as government bonds. But they are on the hook for claims after a large disaster.

Cat bonds have made their way into the hands of ordinary investors through funds marketed under Europe’s UCITS label. As of June, UCITS cat bond funds managed about $17bn in assets. That value has more than tripled since June 2020, when the funds held about $5bn, Plenum data shows.

In a June report, Esma advised the commission to exclude cat bonds — as well as other alternative investments such as cryptocurrencies and real estate investment trusts, or REITs — from UCITS-labelled funds, with an allowance for indirect exposure to the excluded assets, up to a 10 per cent cap.

Esma raised concerns that demand for cat bonds could dry up after a big catastrophe or during a period of heightened risk, such as hurricane season. The regulator also said cat bonds were “structured in a way which is closer to insurance products than a traditional transferable security.”

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Cat bond fund managers have retorted that the bonds are collateralised by highly rated securities like US Treasuries — making them safer than other alternative investments — and that they are traded on a daily basis. The industry added that the bonds could help Europe become more resilient to climate change, by helping to bring down the cost of insurance.

Grieger acknowledged that cat bonds had not yet been tested by a mass payout event. But he argued that a wipeout could draw in more investment — rather than triggering a sell-off of the bonds — since insurance prices typically rise after catastrophes, driving up returns.

“Yes, there could be a big event . . . but my suspicion is, because investors are so well informed, they will not be surprised,” Grieger said. “If there is a 9.0 [magnitude] earthquake in California, they know they will have lost money.”

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