Alternative investment managers are starting to take a serious interest in wildfire-linked catastrophe bonds, moving into a risk category that was considered too difficult to model just a few years ago.
More than $5 billion in cat bonds were issued by insurance companies with exposure to wildfire risk, according to Artemis, an insurance-linked securities specialist that tracks market trends. That’s more than double the level in 2024, just a blip on individual bond sales in the tens of millions of dollars in previous years.
Although still small, wildfire bonds helped drive the 2025 cat bond total’s $23 billion bounce, Artemis says, putting the total market on track to end this year at about $60 billion. Accreture RE, an insurance broker, says the shift in bond investors’ sentiment towards bushfire risk follows improvements in modelling, which it says has encouraged fund managers to move into “once-untouchable” risk categories.
Read more: Mass-market gains in catastrophe bonds put insurers on the back foot
Dirk Schmelzer, senior fund manager at Plenum Investments AG, said the development could point to a more fundamental change in how some catastrophe bonds are structured in the coming years, with the insurance industry becoming more dependent on the capital markets and the power of wildfires.
“Historically, wildfire exposure was added to the mix of earthquake and hurricane risk,” Schmelzer said. “Now that it’s become such a big risk in the market, it’s worth putting that risk on a standalone basis.”
Interest in wildfire cat bonds has been fueled in large part by developments in California, where severe back-to-back fire seasons have made reinsurance against such blazes prohibitively expensive. The fires that swept through Los Angeles in January destroyed more than 16,000 buildings and caused $40 billion in insured losses.
The L.A. Fire was a major reason why global insured losses from natural disasters topped $100 billion in 2025, marking the sixth consecutive year in which that threshold has been exceeded.
Hardly any of those losses impressed Billy’s bond investors, however, with initial estimates from Fitch Ratings indicating the blow they absorbed totaled less than $250 million.
But as climate-driven urban fires become a more regular occurrence, insurance companies and utilities are increasingly looking for ways to channel their risk into capital markets.
Notable examples include the first wildfire cat bond issued by the California Fair Plan Association, the state’s insurer of last resort. The deal, which is priced this month, is set to raise $750 million in wildfire coverage, according to a person familiar with the deal, who asked to discuss confidential information. This is the biggest pure wildfire cat bond ever, the man said.
Other wildfire-prone regions are also weighing the use of cat bonds. Colorado lawmakers have introduced legislation that would open the door to the use of such financial instruments to manage the state’s growing wildfire threat.
In Europe, where the fire season is also spreading, the European Central Bank and the region’s insurance authority have supported using cat bonds to supplement insurance facilities and provide “immediate liquidity” for post-disaster reconstruction.
The ability to build financial products around wildfire risk is improving thanks to upgrades in models developed by firms including Moody’s Corp., Verisk Analytics Inc. and Karen Clarke & Co. Artificial intelligence is also helping modelers crunch data with more reliable loss estimates.
“For cat bonds, this translates into more informed pricing and broader investor participation, which we have clearly seen in the increase in deals exposed to the 2024-2025 wildfire,” said Accreture RE.
For now, though, the risk premiums on cat bonds on wildfires are considerably higher than on more traditional bonds based on risks like hurricanes. In 2025, wildfire cat bonds are worth six to eight times more, compared with a multiple range of two to four, for bonds that target better-understood risk categories in the U.S., such as windstorms.
According to Dirk Lohmann, ILS vice chairman at Schroders, the models being used “remain less mature and less empirically calibrated than for high wind or earthquake events.” That’s “especially true” for wildfire risk, he said.
A wider market
More broadly, cat bonds are expected to see tighter spreads in 2026, partly reflecting the fact that investors haven’t faced any big losses. Hurricane Melissa, which tore through Jamaica and triggered the island’s $150 million cat bond, missed the U.S. and did not affect the main market.
The Swiss Re Global Cat Bond Performance Index is up about 11% in 2025, compared with about 77% in the Bloomberg index tracking U.S. corporate bonds, and 6% in U.S. Treasuries. The S&P 500 index has gained nearly 15 percent this year. The continued demand for cat bonds also rests on their ability to function as versatile workers in departments. When markets tanked in response to the tariff announcements in April, for example, cat bonds went on the unscathed path.
Underlying issuance is expected to be “heavy” in 2026, as the cost of lower-spread issuance declines, according to Twelve Securities, an asset manager focused on insurance-linked securities and cat bonds.
The insurance market is also expected to push additional risks and so-called secondary risks into the capital markets, says Etienne Schwartz, chief investment officer of liquid strategy at Bara Securities.
“Whether we like it or not is a different question,” he said. “But that’s the trend for 2026.”
The year also saw the launch of the world’s first cat bond exchange-traded fund. The Brockmont Catastrophe Bond ETF (ticker ILS), which failed to make a lead market when it went public in April, has since started to draw in client money. Assets in the ETF have grown to about $30 million, well above the $25 million threshold, according to Bloomberg data.
“I think we should be comfortably at $50 million by the end of the first quarter,” said Ethan Powell, chief investment officer at Texas-based Brookmont.
And King Ridge Capital Advisors is now planning to launch a cat bond ETF in Europe. According to King Ridge co-founder and chief executive officer Rick Paganani, this is “an opportunity to pursue European ETFs.”
Photo: A firefighter climbs down a burning house during the Eaton fire in Altadena, California, on January 8, 2025. Photo credit: Michael Nigro/Bloomberg
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Titles
Catastrophic natural disasters such as forest fires
