Bond. Cat Bond.

One year after Hurricane Andrew struck Bermuda and the southeastern United States in August 1992, stunning the insurance and reinsurance markets with a staggering $15.5 billion in losses, a reinsurance broker at a conference on captive insurance pulled me aside.

The broker said he had a scoop: the development of “Acts of God” bonds securitizing natural disaster risks. The unusual phrase, frequently used in statutory law, refers to a severe, unanticipated event.

I reported on these new bonds in September 1993. The following year, the industry dropped the phrase “Acts of God” as Hannover Re issued the first catastrophe bond, transferring $85 million in hurricane risk to the capital markets. Since that modest beginning, insurers and reinsurers have issued a multitude of catastrophe bonds to offload to investors a growing portion of the extreme financial losses caused by hurricanes and other natural disasters.

The innovative approach to transferring catastrophic risk has become a massive market, breaking records year after year. Nearly $23 billion in cat bonds, as the industry calls them, were issued between August 2024 and July 2025, on top of $18.6 billion issued from August 2023 to July 2024, according to market analyst Artemis. This represents “a landmark stretch of activity for this segment of the insurance-linked securities (ILS) market,” says a press release from Artemis, which has been tracking catastrophe bonds since the 1990s.

In an interview, Steve Evans, Artemis founder and owner, marveled over the catastrophe bond market’s acceptance as a routine part of ceding natural disaster risks. “It has really become something absolutely core to the reinsurance arrangements of a lot of the world’s biggest insurers and reinsurers. Not only is the range of catastrophe bond sponsors growing beyond insurers and reinsurers, the sophistication in how the issuers use capital market products for different areas of their reinsurance is expanding.”

This use includes layering catastrophe bonds across a reinsurance tower, often at different attachment points with varying limits—a growing way for insurers and reinsurers to spread risk among different investors. The expanding range of sponsors, the entities that seek to transfer portions of their catastrophic risks to investors, includes federal, state, and local governments in the United States and government entities abroad. France, Germany, Italy, and the Netherlands have sponsored catastrophe bonds, and both the state-administered California Earthquake Authority and Florida Hurricane Catastrophe Fund have issued them.

Non-insurance entities including Kaiser Permanente, PG&E, Alphabet, and Sempra Energy are other sponsors of recent vintage. Google parent company Alphabet uses the bonds to protect corporate operations in California from earthquake losses and Sempra and PG&E to cover their risks from California wildfires. Kaiser Permanente’s catastrophe bond transfers earthquake-related workers compensation exposures. Novel uses of catastrophe bonds also have developed to securitize systemic cyber events and even casualty losses, a market that could dwarf the size of property catastrophe bonds.

A “Tempering Force” on Rates

All this began more than 30 years ago with an innovative idea for an alternative asset class that offered attractive diversification benefits. As pension funds, hedge funds, and sovereign wealth funds showed interest in investing in catastrophe bonds, an army of insurance companies lined up to sponsor them to further spread risk.

Artemis compiles an exhaustive list of catastrophe bond issuances by a veritable Who’s Who of Insurers on its market dashboard. Here’s just a few of the issuers: Aetna, AIG, Allstate, Chubb, Farmers, Great American, Hartford, Liberty Mutual, Nationwide, and State Farm. According to an August 2025 report on the ILS market by ratings agency AM Best and reinsurance broker Guy Carpenter, 35% of small to midsize insurers in the United States issued catastrophe bonds in 2025, up from 21% in 2024.

Many reinsurers such as Swiss Re, Hannover Re, SCOR, and Everest Re also have tapped into vast capital markets to absorb progressively larger natural disaster risks. Altogether, use of catastrophe bonds presents an alternative to traditional reinsurance and retrocessions. More reinsurance capital is available to underwrite new business and make investments that may lead to more competitive coverage pricing at a time when traditional reinsurance capacity is constrained. Assuming greater reinsurance capacity is available to primary insurers at lower cost, both homeowners and small businesses stand to benefit through a trickle-down effect.

That’s especially good news in disaster-weary states such as Florida, Texas, California, Oklahoma, and Louisiana, among others, where homeowners and businessowner insurance have become increasingly unaffordable and, in some cases, unavailable from private insurers. “The price of insurance and reinsurance would be much higher today were it not for capital market participation in assuming some of these risks,” says Robert Hartwig, clinical associate professor of risk management, insurance, and finance at the University of South Carolina.

As the volume of catastrophe bonds increases, reinsurance capacity will balloon and exert a “tempering force” on insurance rates, Hartwig predicts. “That bodes well for policyholders, since the frequency and severity of major catastrophic events are too risky for the admitted insurance markets,” he says.

The financial strain on insurers caused by these disasters and higher reinsurance costs is pushing primary insurers to sponsor catastrophe bonds, says William Dove, president of Princeton Actuarial and Risk Consulting. “Primary insurers are getting squeezed by regulators restricting what they can charge policyholders,” he says. “Being forced into a loss is not a responsible plan of action. By shifting some of their exposures to capital market investors in cat bonds, they can continue offering coverage that otherwise might be too risky.”

Investing Sophistication and Returns

The keystone in the development of catastrophe bonds and the ILS market at large is investors’ interest in and appetite for bearing the risk of significant financial losses resulting from a major hurricane, earthquake, or wildfire. Like all investments, sometimes you win, sometimes you lose. If a specified catastrophic event occurs, investors risk losing some or all of their principal in a predefined payout to the catastrophe bond sponsor. For example, the January 2025 Palisades and Eaton wildfires in Los Angeles County reportedly triggered several catastrophe bonds, including a $20.5 million private bond sponsored by Mercury Insurance.

Institutional investors are willing to bear such financial risks to obtain the diversification benefits afforded by catastrophe bonds, an alternative investment class that does not correlate with the performance of stocks and bonds and offers the potential for high returns. “Investors buy cat bonds for the yield and the diversification,” says Dove. “The occurrence of an event that causes a loss under the cat bond has a very low correlation with the economy, corporate bankruptcies, interest rates, and other things that affect [the performance of] more traditional fixed-income investments.”

The average return on a catastrophe bond for investors is historically high, reaching a record 19.69% in 2023, according to Swiss Re’s Global Cat Bond Total Return Index. Last year, the average return was nearly as strong at 17.29%. In both instances, the yields outperformed most other fixed-income assets, says Jean-Louis Monnier, global head of ILS at Swiss Re.

Different investor classes invest in catastrophe bonds for different reasons, says Monnier. “Institutional investors like pension funds will typically allocate a very small portion of their assets to the market, but even a small portion is a very large amount of capital under management. At the other extreme are opportunistic investors like hedge funds looking for higher returns that invest in riskier layers [of reinsurance towers] or support risks like wildfire that provide higher returns.”

Monnier adds that many hedge funds largely boost investment in catastrophe bonds during hard markets to capitalize on strong yields, then retreat during soft markets. The market benefits from participation by both institutional and opportunistic investors, sustaining capacity, he says.

Investors generally lock into a catastrophe bond with a three-year maturity, although five-year catastrophe bonds also are available. Shorter maturities reduce the possibility of a payout to the sponsor and make the bonds more liquid and easier to trade in the secondary market, while longer maturities are particularly interesting to sovereign wealth funds that have long-term investment goals, Dove says. He pointed to the Abu Dhabi Investment Authority, a sovereign wealth fund owned by the Emirate of Abu Dhabi in the United Arab Emirates.

“They’ve made significant long-term allocations and are very sophisticated about the construction of their portfolio,” Dove says, adding that the fund seeks to invest in catastrophe bonds that have a low correlation to other asset classes and a yield that is three to four times the potential loss.

Over the past two years, retail investors have become the newest participant in this market. Due to the high minimum investment requirements associated with catastrophe bonds, which often start at $1 million, individual investors can gain exposure through mutual funds like Amundi Pioneer ILS Interval Fund, Stone Ridge High Yield Reinsurance Risk Premium Fund, and Securis Catastrophe Bond Fund. In April 2025, the first ever catastrophe bond exchange-traded fund, Brookmont Catastrophic Bond ETF, debuted on the New York Stock Exchange, offering another avenue for retail investors to access the market. “Assuming retail investors invest in these securities, it would potentially open up a vast new market over time, presenting even greater opportunity to spread the costs of natural disasters across different entities,” Hartwig says.

Market Resilience

There is a potential downside to catastrophe bonds for investors, insurers, reinsurers, and policyholders. A series of catastrophe bonds that trigger simultaneously could produce meaningful losses for investors, possibly reducing their appetite. An example is a handful of financially devastating one in 100-year and one in 200-year natural disasters (such as the 7.8 magnitude earthquake along the Turkey-Syria border in 2023 and Hurricane Helene in 2024). Based on the predefined payout, many investors could lose their entire investment.

Catastrophe bonds are extensively modeled for potential losses in order to reduce this prospect. Specialized modeling firms assess the loss frequency and severity of different types of disasters based on historical events, scientific principles, building structures, engineering expertise, and the changing climate. Using this analysis, catastrophe bonds are priced and structured with different types of triggers that activate a payout.

Nevertheless, even the most accurate models can fail to predict a series of massive disaster-related insured losses in one year that impair investor capital. Even a few modest disasters globally with a single large one can result in investor losses—as in 2022, when Hurricane Ian caused an estimated $50 billion to $60 billion in insured losses. Based on actual and mark-tomarket losses, Evans estimated that the impact on investors in catastrophe bonds “was around the $500 million mark.” He adds: “It’s not yet certain if they’ll become actual losses, as it can take time for loss development.” Swiss Re’s Global Cat Bond Total Return Index ended 2022 with a negative performance of -2.2%, the index’s first-ever negative annual result.

While several major catastrophes in that timespan would severely disrupt the insurance and reinsurance markets, Artemis’ Evans says the industry would recapitalize with the help of catastrophe bonds and other ILS structures.

“Were such a scenario to occur, my gut feeling is that the catastrophe bond market would expand,” he says. “It may be a very quick and very effective way [for insurers and reinsurers] to recapitalize, since rebuilding equity balance sheets takes time.…The pricing of cat bonds for insurers and reinsurers would rise dramatically, increasing investor confidence.”

Monnier agrees. “Insurance rates hardened the following year [2023] and the cat bond market was able to provide large amounts of capacity as the yields became more attractive [to investors],” he explains. “Opportunistic investors know the space and understand it well. I’m confident that new capacity will be found even during periods of significant cat bond losses.”

The resilience of the catastrophe bond market has had another ameliorating effect—diminishing the insurance industry’s interest in a federal national disaster backstop. “It’s much less than it was 20 years ago, in part because of a steadier source of capital beyond traditional reinsurance, meaning cat bonds,” says Hartwig. “Back then, Allstate was a supporter of a backstop. These days, they’re one of the biggest issuers of cat bonds.”

While the cat bond market might slow there is little chance of it drying up, says Matt Tuite, director of insurance-linked securities at AM Best: “The issuer side is very strong because traditional reinsurance pricing is a bit high.” He projects that the cat bond market will continue to grow, “just not as fast as it has grown the past few years. It’s not a cure-all for natural disaster risks but it is an important part of the insurance and reinsurance ecosystem, bringing in more capacity to cover risks that should trickle down to help Joe and Jane Homeowner. At least that’s the hope.”