Insurance Curator NEW YORK — Institutional investors and large insurers are pressing the limits of catastrophe‑bond pricing as an unprecedented wave of issuance collides with a recalibration of risks after recent major natural disasters, pushing yields and discount margins higher and forcing first‑world insurers to rethink how much tail risk they will cede to the capital markets. Who: global re/insurers and institutional investors; What: a surge in catastrophe‑bond (cat‑bond) issuance and shifting spreads; When: principally through 2025 into early 2026; Where: capital‑markets platforms in Bermuda, New York and London with consequences for U.S. and European insurers; Why: a mix of record issuance, rising insured losses and renewed concern about modelling and basis risk that is testing the market’s risk‑return tradeoffs. (artemis.bm)
Summary
- The cat‑bond market set multiple issuance records in 2025 even as the average yield and risk spreads moved episodically, reflecting both abundant investor demand and renewed caution after high‑profile catastrophe payouts. (artemis.bm)
- Sponsors from large U.S. insurers to Bermuda reinsurers used capital markets retrocession and top‑layer protection to supplement traditional reinsurance, illustrating that first‑world carriers are relying on ILS to manage peak perils. (artemis.bm)
- Market participants warn that the next severe loss year — Swiss Re models put a 1‑in‑10 chance at insured losses as high as $300 billion — could quickly reset risk premia and test investor willingness to absorb catastrophe losses. (swissre.com)
Why the market swelled — and why spreads matter
The insurance‑linked securities (ILS) market enjoyed explosive growth in 2025, as issuance surged to new highs and the universe of institutional buyers widened. Artemis, the specialist ILS publication, reported total tracked issuance across Rule 144A and private cat‑bond transactions of more than $25.6 billion for 2025 — a roughly 45 percent jump on the previous annual record. That expansion pushed the outstanding market to historically high levels and encouraged insurers to offload peak exposures to capital markets investors. (artemis.bm)
Investors have been attracted by returns and low historical correlation with conventional financial markets. ILS fund indices and private strategies delivered strong performance through 2025, with catastrophe‑bond funds and private ILS strategies reporting double‑digit returns for the year in some indexes. Those returns, together with an improving secondary market and new exchange‑listed access routes, helped pull new pools of capital into the space. (artemis.bm)
But sustainable investor demand depends on the calibration of spreads — the extra return paid to bondholders above the risk‑free collateral yield to compensate for expected and tail losses. After a long period of spread compression through parts of 2024 and 2025, market indicators showed a seasonal and event‑driven widening in late 2025. Specialist manager Plenum Investments told Artemis that “in December, the market returned to its typical seasonal spread‑widening regime,” and that month‑to‑month yields increased. That repricing lifted the headline cat‑bond market yield toward 8.8 percent at year‑end, driven primarily by a rise in the discount margin available to investors. (artemis.bm)
Insurers use cat bonds for top‑layer and retrocession protection
For first‑world insurers and reinsurers, cat bonds are no longer a niche engineering solution but a routine component of capital and risk‑transfer strategies. In 2025 a wide array of sponsors — from U.S. personal‑lines groups to Bermuda reinsurers — returned to the market. Farmers Insurance secured a $400 million Topanga Re catastrophe bond to rebuild multi‑year capacity, with CFO Thomas Noh calling the transaction “an important component of our risk management strategy.” RenaissanceRe and others upsized retrocession deals as they sought to take advantage of investor depth and efficient pricing. (artemis.bm)
Bermuda and London remained structuring and listing hubs for many transactions, while U.S. state and private insurers also used cat bonds and parametric facilities to secure quick liquidity for event response. The expansion in structures — industry‑loss‑index triggers, multi‑peril covers, longer tenors and even cyber aggregate deals — shows sponsors pressing for capital efficiency and bespoke cover where traditional reinsurance markets do not fit. (artemis.bm)
What recent catastrophes changed
The role cat bonds play in carrier balance‑sheet planning has been reshaped by the scale and frequency of recent events. Swiss Re’s sigma research found global insured natural‑catastrophe losses reached $137 billion in 2024 and projected insured losses trending toward $145 billion in 2025; its modelling also assigns a material probability to extraordinarily large loss years, noting a 1‑in‑10 chance global insured losses could hit $300 billion. That prospect forces reinsurers and cedents to consider whether retained capital and traditional retrocession will be sufficient without capital‑markets support. (swissre.com)
High‑profile government and sovereign uses of parametric and index‑linked instruments have also tested investor expectations. In late 2025 Hurricane Melissa prompted expectations of a parametric payout from a World Bank‑arranged Jamaica facility; fund managers and bondholders watched the event closely as a demonstration of how quickly capital‑markets instruments can deliver liquidity. Financial‑markets commentary noted that even a full principal loss on a sovereign‑sponsored bond is unlikely to damp investor appetite for the asset class overall, but any sovereign payout crystallises the event‑risk profile that investors must price. (ft.com)
Investor demand is broadening — and structural limits remain
Institutional interest has deepened beyond specialist ILS funds. For the first time in recent years large public pension funds and mainstream asset managers have signalled material allocations or vehicles to access cat‑bonds: California’s giant pension CalPERS reportedly made its first cat‑bond investment in 2025, and Brookmont launched the first U.S.‑listed catastrophe‑bond ETF, making the asset class tradable to a broader institutional and corporate audience. Industry sources say that pension and sovereign wealth capital is typically attracted by ILS for diversification and return, but these investors still require scale and operational capacity to evaluate non‑financial risk. (artemis.bm)
Yet important frictions persist. Several large institutional investors remain cautious about basis risk (mismatches between actual losses and bond triggers), liquidity constraints in stressed markets and the challenge of building meaningful allocations to a relatively small universe of issuances. Artex Capital Solutions and other structurers have flagged hesitancy among some pensions and insurers to increase allocations until product standardisation, secondary‑market depth and modelling transparency improve. (bermudareinsurancemagazine.com)
Pricing and capacity: a cyclical story with new mechanics
The interplay of supply and demand has produced rapid shifts in pricing. Abundant reinsurance capital — including retained earnings among reinsurers and inflows of third‑party capital — helped depress conventional reinsurance rates at several renewals, according to Guy Carpenter’s January 1, 2026 renewals report. Guy Carpenter reported double‑digit drops in catastrophe rate‑on‑line indexes at the 2026 renewals and noted that alternative capital growth was a material factor pushing pricing lower. At the same time, the cat‑bond market’s record issuance in 2025 has introduced more supply into the top layers of the reinsurance tower, with some transactions priced at or below initial guidance because managers faced strong investor order books. (carriermanagement.com)
But that equilibrium is fragile. Plenum’s year‑end analysis showed discount margins rose in December 2025, reversing months of compression; the firm warned yields could revert toward the long‑term average within months if seasonal spread widening continued. For sponsors, tighter pricing is attractive in the short run — it reduces the cost of capital and complements balance‑sheet capital — but it also narrows the margin of error should a materially large loss year occur. (artemis.bm)
Voices from the market
Market participants express both optimism and caution. Ryan Mather, CEO of Ariel Re, which issued multiple Titania Re transactions, said the firm was “delighted to have successfully issued our fifth catastrophe bond” and welcomed investor support for multi‑year protection. That sentiment reflects sponsors’ view that ILS markets provide predictable, long‑dated capacity that complements treaty reinsurance. (artemis.bm)
From the investor side, short quotes and paraphrases from managers capture the balance. A Plenum Investments representative told Artemis that the market “returned to its typical seasonal spread‑widening regime” in December 2025 as hurricane‑season flows abated and investors recalibrated risk premia. Institutional allocators see attractive, uncorrelated yields but are increasingly focused on trigger design and model governance. (artemis.bm)
Regulatory and modelling tensions
As ILS becomes a core component of risk architecture for major insurers in developed economies, regulators and rating agencies have been paying closer attention to transparency, modelling assumptions and counterparty implications. Moody’s and other agencies have revised methodologies and guidance to capture the specificities of cat‑bond triggers and expected loss assumptions; this is intended to improve comparability and inform capital and reserving decisions by regulated insurers. Meanwhile, cedents and investors press model vendors for scenario‑level transparency, robust parameter governance and forensic post‑event calculation rules to reduce disputes over payouts. (artemis.bm)
The risk to investors is not only event frequency but evolving perils. Swiss Re notes that secondary perils such as severe convective storms (SCS) and wildfire continue to drive a large share of recent insured losses, challenging traditional hurricane‑centric modelling and opening the door for unexpected aggregation. That diversification of peril drivers has been a factor in the structure of several 2025 deals that expanded peril cover or used state‑weighted industry triggers. (swissre.com)
What this means for first‑world insurers
For insurers operating in the United States and Western Europe, the rise of ILS and the recalibration of spreads create both opportunity and strategic choices. Cat‑bond access gives carriers an alternative to buying increasingly commoditised treaty reinsurance at soft rates, allowing them to lock in multi‑year top‑layer protection and reduce earnings volatility from peak peril years. At the same time, insurers must weigh the cost of collateralised cover, potential basis mismatch with their loss portfolios, and reputational risks that follow public payouts on sovereign or parametric contracts. (artemis.bm)
Insurers also face capital‑management considerations. Swiss Re’s warning about the non‑negligible probability of an extreme loss year highlights the systemic role that alternative capital can play — but it also underlines the need to ensure that cat‑bond investors are adequately compensated and informed. Sponsors that rely heavily on ILS must maintain diverse hedging approaches and guardrails — including careful trigger design, layered retrocession and contingent liquidity facilities — to avoid concentrated reliance on a single capital channel. (swissre.com)
Looking ahead: scenarios that will reset spreads
Market practitioners identify several developments that could force a rapid repricing of cat‑bond spreads:
- A major, above‑trend insured loss year (a Swiss Re–style “peak loss” scenario) that triggers multiple large cat‑bond payouts. That would drain collateral pools and reset expected‑loss assumptions. (swissre.com)
- A cluster of parametric or index disputes that erode investor confidence in trigger mechanics and event modelling, leading to higher demanded spreads or reduced allocations. (ft.com)
- A macro‑financial shock that compresses the risk‑free return on collateral sharply, altering the net yield investors receive and thereby the price sponsors must offer to attract capital. (artemis.bm)
Even absent a severe loss year, market structure matters: growing issuance, more standardised products, a deeper secondary market and wider participation from pensions and ETF investors could compress illiquidity premia and reduce spreads over time. That outcome would be positive for insurers seeking cheaper capital markets protection, but it raises a structural question for investors seeking compensation for tail risk in a permanently larger market. (artemis.bm)
Conclusion
Institutional appetite for cat bonds is testing market spreads and forcing a re‑examination of risk‑return expectations for both issuers and investors. In 2025 the market proved remarkably elastic — record issuance coexisted with periods of spread compression — but the end of year widening and the modelling warnings from reinsurers and research houses show the relationship between catastrophic events and capital‑markets pricing remains dynamic and fragile. For insurers in first‑world economies, the lesson is clear: catastrophe bonds are now part of the toolkit, but they must be deployed with rigor — careful trigger design, diversified hedging and continuous dialogue with investors — to ensure that the promise of capital‑markets risk transfer survives the next peak loss year. (artemis.bm)
Reporting and sources
This article draws on market data and reporting from Artemis, Guy Carpenter, Swiss Re Institute (sigma), Plenum Investments (as cited by Artemis), Risk & Insurance, and coverage by the Financial Times. Specific deal and market details referenced come from Artemis deal reports and industry renewals reporting cited above. (artemis.bm)