Carriers
EFAMA pushes back on ESMA plan to restrict cat bonds in EU retail funds
By Insurance Wire Staff, . Insurance Wire.
The European Fund and Asset Management Association (EFAMA) is urging EU policymakers not to follow a recommendation from the European Securities and Markets Authority (ESMA) that would restrict how catastrophe bonds, securities that transfer natural disaster risk from insurers to capital markets investors, can be held inside UCITS funds, the dominant structure for retail investment in Europe.
Artemis reported that EFAMA, which represents the EUR 33 trillion European investment management industry, published a paper responding to ESMA's June 2025 technical advice to the European Commission. ESMA's recommendation would mean cat bonds could only count toward the 10% limit that UCITS rules allow for non-standard assets, rather than being treated as fully eligible investments.
What EFAMA is arguing
EFAMA's core case is that cat bonds belong in UCITS portfolios precisely because they behave differently from stocks and bonds. Federico Cupelli, EFAMA's Deputy Director of Regulatory Policy, said: "Catastrophe bonds offer investors relevant diversification benefits and have a well-established secondary market. Rather than revisiting their eligibility, policymakers should focus on preserving the conditions that have enabled such instruments to contribute effectively to UCITS portfolio construction."
Dan Irwin-Brown, EFAMA's Director of Market Insights, Data and Analytics, added: "Cat bonds offer valuable diversification benefits because they are exposed to insurance-related risks whose drivers differ from those influencing traditional financial assets."
The paper cites ESMA's own analysis, which found correlations of just 0.19 to 0.29 between cat bonds and major asset classes, a low figure that reflects how little their returns move in step with equity or credit markets. On liquidity, EFAMA puts estimated annual secondary-market turnover for cat bonds at 23%, comparing that to 33% for investment-grade European corporate bonds and 19% for high-yield.
What is at stake
UCITS cat bond funds held close to $21.8 billion in assets at the end of September 2026, according to the figures Artemis published alongside EFAMA's paper. That pool of capital would face disruption under ESMA's approach: EFAMA warns that affected investors "would need time to find alternative investment structures or might no longer be able to participate, potentially reducing the market's capacity to mobilise capital when it is needed most."
The investor base is overwhelmingly institutional. Industry estimates cited in the paper put direct retail investors at roughly 1% of UCITS cat bond allocations, with the rest held by banks, wealth managers, pension funds, fund-of-funds and family offices.
EFAMA also makes a broader social argument: cat bonds help close the insurance protection gap by channeling private capital into natural disaster coverage. Restricting UCITS access, the paper argues, would reduce the market's ability to deploy that capital quickly and at scale.
What happens next
The European Commission has not yet responded to ESMA's June 2025 recommendation, and the outcome of the Eligible Assets Directive review remains open. EFAMA joins asset managers including Plenum, which Artemis has previously reported also urged the Commission not to adopt ESMA's position, in lobbying for the status quo.
The practical question for fund managers and allocators is whether the Commission follows ESMA's lead or accepts the industry's argument that the current framework is working. If the 10% cap is imposed, funds holding cat bonds above that threshold would need to restructure, convert to a different vehicle, or close. That process would take time and could move capital out of the market at exactly the moment when demand for disaster risk transfer is growing.
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