The Big Long on Casualty

Following years of growing confidence in catastrophe bond performance, institutional investors are positioned to consider investments in insurance-linked securities (ILS) structures for casualty risks.

While modeling the less predictable aspects of low-frequency, high-severity casualty risk events remains complex, recent developments suggest growing investor and insurance industry interest in the concept.

The reason is twofold: investors gain the diversification benefits of another asset class, which could provide the high returns they’ve become accustomed to in the catastrophe bond market while shifting risk; and casualty ILS structures benefit insurers’ strategic capital management priorities, presenting an alternative to traditional equity or debt to source, free up, or deploy capital for growth.

At a June 2025 conference on the securitization of casualty risks, a panel of speakers expressed enthusiasm about the potential for casualty insurance-linked securities to achieve significant market traction and eye-opening growth in coming years. Moderator John Seo, co-founder and managing director at Fermat Capital Management, predicted that the casualty ILS market will someday dwarf the size of the traditional catastrophe bond market, given potential investor returns in the mid-teens to low-20s.

In an interview, he elaborated on his projection. “Globally, casualty premiums are in excess of $2 trillion, a massive amount of cash flow that, if securitized correctly, is 10 to 50 times larger than classic catastrophe bonds,” Seo says. “A cash flow with an internal rate of return in the mid-teens with no catastrophic component makes it easier to pitch this product to investors than cat bonds.”

Casualty ILS allows insurers to liberate capital that otherwise would be tied up in reserves for casualty risks. This capital can then be strategically deployed to pursue acquisitions and other growth opportunities that contribute to shareholder value. “We’re at an inflection point now, where momentum is taking off,” Seo says.

Ledger Investing created the first casualty ILS fund in 2021. At year-end 2024, the fund reached the $2 billion milestone. In August 2024, Ledger entered into an agreement with Fermat Capital to manage its casualty ILS funds. One month later, market analyst Artemis announced that Ledger had developed a new $100 million casualty sidecar for an unidentified reinsurance company transferring a portion of its casualty risks to investors, suggesting increasing maturation.

Challenges persist, however, including whether uncertainty in accurately modeling complex longtail casualty risks may blunt some of the takeoff. It can take years and even decades for casualty losses to develop, making it difficult to model the ultimate cost and timing of claims, says Wai Tang, senior director of insurance-linked securities at AM Best. “Unlike the high-severity, low-frequency events in a cat bond, you’re dealing with low-severity, high-frequency events that can linger for years, creating a need to solve the problem of commutation,” Tang explains. “Nevertheless, the market is trying to structure deals that can satisfy the interests of investors and provide more comfort.”