Investors Embrace Wildfire Cat Bonds as Modeling Improves and Losses Mount

Alternative investment managers are increasingly turning to catastrophe bonds linked to wildfires, stepping into a risk segment that until recently was considered too complex — and too volatile — to price reliably.

Insurers sold more than $5 billion of catastrophe bonds with some exposure to wildfire risk this year, more than double the level seen in 2024, according to data from Artemis, a specialist tracker of insurance-linked securities. In previous years, issuance was limited to sporadic deals worth only tens of millions of dollars.

While still a niche segment, wildfire-linked bonds helped propel overall catastrophe bond issuance to a record $23 billion increase in 2025, putting the total market on track to reach about $60 billion by year-end, Artemis said.

The growing appetite reflects improvements in wildfire risk modeling, which have made the asset class more accessible to institutional investors. Acrisure Re, a reinsurance broker, said better analytics have encouraged fund managers to enter what was once viewed as an “untouchable” risk category.

“The modeling has improved to the point where investors are more comfortable isolating wildfire risk,” said Dirk Schmelzer, senior fund manager at Plenum Investments AG. The trend could signal a broader shift in how catastrophe bonds are structured, he added, as insurers increasingly rely on capital markets to absorb climate-related losses.

“Historically, wildfire exposure was bundled together with earthquake and hurricane risk,” Schmelzer said. “Now it has become such a dominant peril that it makes sense to place it on a standalone basis.”

Much of the momentum has been driven by conditions in California, where consecutive severe fire seasons have pushed traditional reinsurance costs sharply higher. Fires that swept through the Los Angeles area in January destroyed more than 16,000 buildings and resulted in a record $40 billion in insured losses.

Those events were a key factor behind global insured losses from natural disasters exceeding $100 billion in 2025, the sixth consecutive year the threshold has been breached.

Cat bond investors, however, were largely insulated. Fitch Ratings estimates that losses absorbed by catastrophe bond holders this year totaled less than $250 million, underscoring the appeal of the instruments as a way to transfer extreme risk away from insurers’ balance sheets.

As climate-driven urban wildfires become more frequent and destructive, insurers, utilities and public entities are expected to lean more heavily on capital markets to manage exposure — potentially cementing wildfire catastrophe bonds as a permanent feature of the alternative investment landscape.