Alternative investment managers are starting to take a serious interest in catastrophe bonds tied to wildfires, movi
ng into a risk category that just a few years ago was seen as too difficult to model.
More than $5 billion of cat bonds with some level of exposure to wildfire risk were issued by insurers and sold to investors this year, according to Artemis, a
specialist in insurance-linked securities that tracks market trends. That’s more than twice the level in 2024, with pr
evious years seeing just a smattering of individual bond sales in the tens of millions of dollars.
Though still small, wildfire bonds helped drive a record $23 billion bounce in overall 2025 cat bond issuance, Artemis s
ays, putting the total market on track to end the year at around $60 billion. Acrisure Re, a reinsurance broker, s
ays the shift in bond investor sentiment toward wildfire risk follows i
mprovements in modeling, which it says have encouraged fund managers to move into a “once untouchable” risk category.
Read more: Catastrophe Bonds’ Huge Market Gains Put Reinsurers on Backfoot
Dirk Schmelzer, senior fund manager at Plenum Investments AG, says the development may point to a more fundamental shift in how some catastrophe bonds
get structured in the years ahead, with the ferocity of wildfires leaving the insurance industry ever more reliant on capital markets.
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“Historically, wildfire exposure was included within a mix of earthquake and hurricane risk,” Schmelzer said. “Now it’s become such a big peril in the market, it’s
worth placing 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-bac
k fire seasons have made reinsurance against such blazes prohibitively expensive. The flames that swept through Los
Angeles in January destroyed more than 16,000 buildings and caused a record $40 billion in insured losses.
The LA fires were a major reason global insured losses from natural disasters soared past $100 billion in 2025, mar
king the sixth consecutive year in which that threshold has been exceeded.
Hardly any of those losses affected cat bond investors, however, with Fitch Ratings’ initial estimate indicating the setback they absorbed was less than $250 million in total.
But as climate-fueled urban fires become a more regular occurrence, insurers and utilities are increasingly looking for ways to offload their risk to capital markets.
Notable examples include a debut wildfire cat bond issued by the California FAIR Plan Association, the
state’s insurer of last resort. The bond, which priced this month, is set to raise $750 million in
wildfire cover, triple the initial target, according to a person familiar with the deal who asked not to be identified discussing confidential information. It’s the largest pure
wildfire cat bond ever brought to market, the person said.
Other wildfire-prone regions are also weighing the use of cat bonds. Colorado lawmakers have put forward legislation that would open the door to using such financial instruments to manage growing wildfire risks in the state.
In Europe, where the fire season is also expanding, the European Central Bank and the region’s insurance authority have backed using cat bonds to complement insurance facilities and provide “prompt liquidity” for reconstruction after disasters.
The ability to structure financial products around wildfire risk is improving thanks to upgrades to models produced by firms including Moody’s Corp., Verisk Analytics Inc. and Karen Clark & Co. Artificial intelligence is also helping modelers crunch data to come up with more reliable loss estimates.