After years of low returns and increasing macro volatility, investors have renewed interest in insurance-linked securities (ILS) due to their very low correlation with traditional financial markets. Despite event-driven volatility, the first half of 2025 reaffirmed the market’s strength and growing scale.
According to mid-year sector dataILS issuance reached $17.2 billion through nearly 60 transactions, making 2025 the second-largest year in the market’s history, with half a year to go. The total market size has now surpassed $56 billion and has grown by more than 75% since 2020. Ten new issuers and three wildfire bonds have been added this year alone, indicating growing investor confidence alongside supportive market dynamics.
Drivers of growth
The increase in issuance is fueled by both sides of the equation: strong demand from sponsors seeking risk transfer and equally strong interest from investors seeking diversification. Higher collateral yields and a wave of bond maturing have created liquidity for reinvestment. At the same time, diversification within the market has deepened, with new sponsors, new threats and more sophisticated deal structures.
Recent issues illustrate this breadth. US hurricane exposure still dominates, but there is also $182 million in coverage for British floods, $105 million for Canada’s earthquake and severe convective storms, and $100 million for French terrorism. Such diversity highlights the maturing nature of the market and its increasing relevance across geographies and hazards.
Performance and investor experience
The performance was another bright spot. The Swiss Re Global Cat Bond Index returned 9.89% over the first ten months of 2025, even as global markets struggled with rates, currency volatility and other macro shocks. Looking back further, the consistency of returns is striking: Since 2002, catastrophe bonds have delivered positive monthly returns almost 90% of the time.
Interestingly, inflation – usually a challenge for insurers – can have an indirect positive impact on the ILS market. Higher insured values at risk increase the need for risk transfer, which widens spreads and can improve returns for investors. In addition, most catastrophe bonds pay floating rate coupons tied to Treasury money market funds, meaning higher interest rates can directly benefit returns.
For multi-asset allocators, the consistent return pattern of catastrophe bonds has made them an attractive addition to traditional fixed income in high-rate environments.
Risk and resilience
The start of 2025 underscored the ever-present risks inherent in catastrophe-related investments. The devastating wildfires in Los Angeles caused approximately $40 billion in insured losses, the largest wildfire-related loss ever. Severe convective storms in the United States generated billions more in claims. More recently, Hurricane Melissa resulted in a 100% disbursement of a $150 million World Bank Catastrophe Bond for Jamaica.
Events like this remind us that cat bonds are not without risk. However, they also demonstrate the resilience of the market. Although some structures were affected, in both cases the broader system absorbed the shocks without widespread disruption. The key lies in accurately understanding and modeling the underlying risks. Investors need to know what risks they are taking, but they should also expect fair compensation in the form of higher spreads and premiums as those risks increase.
Institutions tend to enter the market through specialist funds, with managers using deep expertise in catastrophe modeling to build diversified portfolios. Reinsurers are well positioned in this area due to their access to proprietary data and scientific teams capable of analyzing complex risk factors.
Institutional adoption
What was once a niche investment is increasingly finding its way into mainstream institutional portfolios. An open question remains: how should investors categorize exposure to ILS? Some consider it part of alternative fixed income, others within hedge fund allocations, and some consider it a diversification in its own right.
Most institutions we speak to would allocate around 1% to 3% of their portfolios to ILS. While that may seem modest, even small exposures can significantly increase diversification and income. Modeling suggests that allocations of up to 10% could further improve portfolio metrics, although investors remain cautious and measured given the asymmetric risk profile and event-driven nature of returns.
Looking ahead
The outlook for ILS remains constructive. Risk exposure is increasing due to inflation, urbanization and climate-related pressures, all of which increase the need for capital to absorb catastrophic losses. At the same time, innovation is expanding the range of structures available, including index-based solutions and parametric products that provide faster payouts and more efficient risk transfer.
Further industrialization is also likely. As data quality and model transparency improve, investor confidence in the asset class should increase. However, success will depend on maintaining rigorous risk assessment and disciplined portfolio construction.
Catastrophe bonds and other insurance-linked securities are evolving from a specialist niche to a recognized source of diversification. Their appeal lies in their independence from economic cycles and their potential to provide stable returns even when traditional markets are under pressure. For investors seeking correlated returns, ILS can play a valuable role in portfolio resilience.
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