
Catastrophe bonds (cat bonds) surged to a record $17.7 billion in issuance during 2024, propelling the overall market for these insurance-linked securities to nearly $50 billion. This represents a 7% increase from last year’s peak, according to Artemis, which tracks the industry. The growth reflects insurers’ reliance on private investors to offset increasing costs associated with climate-driven disasters and inflation-driven rebuilding expenses.
Cat bonds offer double-digit returns in exchange for the risk of significant losses if specified disasters occur, such as hurricanes or wildfires. Investor appetite remains robust due to favorable yields, including an average return of 16% this year. Issuers like Allstate Corp. have responded with sizable deals, including a $650 million reinsurance bond protecting against a range of natural perils.
While most cat bonds focus on major, single-event risks, insurers are exploring their use for more frequent secondary perils like hailstorms and wildfires, which collectively account for a significant portion of insured losses. Despite advances in modeling for these risks, challenges remain, particularly in predicting aggregate losses. Analysts expect high single-digit to low double-digit returns in 2025 as demand persists in the hardening insurance market.