EFAMA says cat bonds a “precious diversifier”, UCITS eligibility should remain unchanged

The European Fund and Asset Management Association (EFAMA) has urged European Union policymakers to leave the status of catastrophe bonds unchanged in the UCITS Eligible Assets Directive (EAD), calling the asset class a “precious diversifier” and saying that “limiting asset choice within UCITS per se is not in investors’ best interest.”

EFAMA, a trade association that represents the EUR 33 trillion European investment management industry, has issued a paper in response to the European Securities and Markets Authority’s (ESMA) technical advice regarding cat bond eligibility under the UCITS investment framework.

Recall that, ESMA made a recommendation in June 2025 to the European Commission, not to allow catastrophe bonds as eligible assets in UCITS funds, a move that has generated wide-attention across the insurance-linked securities (ILS) industry.

EFAMA highlights that under ESMA’s proposed approach catastrophe bonds may only be eligible within the 10% limit for alternative assets, within a UCITS strategy.

But EFAMA calls for policymakers to consider the important role of catastrophe bonds within portfolio diversification and natural disaster risk transfer, highlighting that the asset class deserves to have its eligibility status unchanged.

Federico Cupelli, EFAMA’s Deputy Director of Regulatory Policy, commented, “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. The current UCITS EAD framework is effective and should remain in place.”

Dan Irwin-Brown, EFAMA’s Director of Market Insights, Data & 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. They are a good example of why investors should retain access to alternative asset classes within the well-regulated UCITS framework.”

UCITS catastrophe bond funds hit a combined nearly $21.8 billion in assets under management at the end of September 2026, demonstrating how important this fund structure has become for the ILS investment sector.

EFAMA notes that UCITS cat bond funds are an important and growing component of the catastrophe bond market, a marketplace that delivers meaningful benefits to its investor base in the portfolio diversification it offers to them, as well as to society in the vital disaster risk transfer the capital supports globally.

The trade association stated, “With regards to the EAD review, EFAMA is of the opinion that any reform should maintain the credibility and recognition of the UCITS label globally. It believes UCITS should retain a degree of flexibility to access – in a controlled manner – the benefits of limited exposure to assets uncorrelated to financial markets. It also believes investors should have access to an investment portfolio that reflects contemporary best practices in allocation and diversification terms, allowing asset managers to access the broadest possible investment universe while enabling the UCITS brand to play its part in the climate change transition and adaptation efforts.”

The EFAMA paper highlights “the advantages of keeping less traditional asset classes in UCITS portfolios,” using catastrophe bonds as an example.

It drives home the message that cat bonds are a “precious diversifier” for investors, with ESMA’s own analysis showing correlations of just 0.19–0.29 with major asset classes they examined.

In addition, cat bonds have an active secondary market and their liquidity compares well to other asset classes, with EFAMA saying, “estimated annual secondary-market turnover is 23%, versus 33% for investment-grade and 19% for high-yield European corporate bonds.”

In addition, industry estimates suggest that direct retail investors make up just roughly 1% of the UCITS cat bond investor base, while UCITS access is also important for allocators whose mandates restrict other fund structures.

In fact, access to UCITS cat bond funds is largely through institutional, professional, and intermediated channels, with banks and wholesale investors, wealth managers and independent financial advisers, pension funds, fund of funds and family offices making up the remainder of allocations to this investment segment, EFAMA notes.

With the insurance protection gap still significant around the world, the ability of the capital markets to contribute vital risk capital through instruments such as cat bonds is also seen as socially important, when it comes to natural disaster risk transfer.

Regarding potential changes to the UCITS Eligible Assets Directive (EAD) that might be considered, EFAMA urges that “any reform should maintain the credibility and recognition of the UCITS label globally.”

UCITS strategies should retain a degree of flexibility, in a controlled manner, to provide the benefits of exposure to asset classes that are uncorrelated to financial markets, the paper explains.

EFAMA concludes in its paper that, “Any review of the UCITS EAD should not lead to material changes affecting investors interested in the wrapper, which would likely require the USD 21bn within Cat bond-focused UCITS to be adjusted through reallocation, conversion / relaunch into another structure, or potentially fund closure.

“Many alternative assets – as illustrated with a specific asset class in this Market Insight – exhibit low correlation to traditional assets. Cat bond drawdowns have historically been less severe on a portfolio level than historic drawdowns in equity markets. They therefore act as a precious diversifier. Combining all alternative exposures into a 10% threshold, as currently proposed, would strongly limit investor diversification and return benefits.

“In the case specifically of UCITS Cat bonds, aside from the benefits for investors (primarily diversification), there are also important benefits to society (i.e. filling the insurance protection gap) as well as sponsors (i.e. allowing them to free capacity for further insurance needs), which should be taken into account when considering the potential stifling of the market from the demand side.”

EFAMA also explains that, “Absent evidence of significant market failure / investor harm from the current eligibility interpretations, limiting asset choice within UCITS per se is not in investors’ best interest, esp. by eliminating controlled exposures to alternative assets beyond the mere 10% ‘non-eligible’ limit.

“Finally, an established market – in this case that of Cat bonds – can mobilise capital rapidly and at scale. Further restrictions on UCITS investment in Cat bonds could disrupt the existing investor base, as 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.”

There has been no response from the European policymakers to ESMA’s technical advice so far, but the topic remains high on the agenda within the asset management community and EFAMA now adds its voice to the calls for any response to be prudent and to consider the benefits that assets such as catastrophe bonds provide to investors, the sponsors of the instruments and to wider society.

You can read the full paper via the EFAMA website.

Also read:

– Plenum urges European Commission not to adopt ESMA’s UCITS cat bond recommendation.

– ESMA UCITS cat bond issue “a kind of power struggle between national regulators” – Plenum’s Grieger.

– LGT ILS Partners sees retail investor path as part of ESMA’s proposed UCITS ruling: Stahel.

– ESMA conceptually takes view cat bonds may sit better under a new AIF wrapper framework.