Catastrophe Bonds Linked to Wildfires Lose ‘Untouchable’ Status

Core Insights - Alternative investment managers are increasingly interested in catastrophe bonds linked to wildfire risks, a sector previously deemed too complex to model [1][3] Catastrophe Bonds Market Overview - Over $5 billion in catastrophe bonds with wildfire exposure were issued in 2025, more than double the amount from 2024, which had seen only individual bond sales in the tens of millions [2] - The overall issuance of catastrophe bonds reached a record $23 billion in 2025, with projections indicating the total market could end the year around $60 billion [3] Investor Sentiment and Market Dynamics - Improved modeling techniques have shifted investor sentiment towards wildfire risks, encouraging fund managers to explore this previously "untouchable" risk category [3][10] - The California FAIR Plan Association issued a debut wildfire cat bond, raising $750 million, which is the largest pure wildfire cat bond to date [8] Regional Developments - Other regions, such as Colorado and Europe, are considering the use of catastrophe bonds to manage increasing wildfire risks [9] Risk Modeling and Pricing - Advances in modeling, including the use of artificial intelligence, have led to more reliable loss estimates for wildfire risks, resulting in better pricing and broader investor participation [10] - Wildfire cat bonds currently have risk premiums six to eight times higher than traditional bonds based on more understood risks, such as hurricanes [11] Market Performance and Future Outlook - The Swiss Re Global Cat Bond Performance Index increased by approximately 11% in 2025, outperforming other bond indices [14] - Primary issuance of catastrophe bonds is expected to be strong in 2026, driven by lower spreads and the reinsurance market's push to transfer additional risks to capital markets [16]