As Hurricane Season Heats up, Insurers Look to Share Risk with Wall Street

The Washington Post

11:49 JST, September 26, 2025

It’s been a record year for placing bets against Mother Nature’s wrath – $18.6 billion and counting.

That’s how much large investors such as pensions and hedge funds are estimated to have spent so far in 2025 buying catastrophe bonds, which insurers and reinsurance firms sell to shed some of the risk of massive natural disasters.

Cat bonds, as they’re known in the industry, often pay double-digit interest rates, but insurers can tap the investment to pay claims if the bond is triggered by big losses from a particular catastrophe – or, in some cases, even if a storm just hits certain wind speeds.

Cat bonds help ease the pressure on insurers, said Michel Leonard, chief economist at the Insurance Information Institute trade group, “and we have a hard market right now” as the industry struggles to get a handle on the threat posed by very expensive disasters. Cat bonds spread the risk to outside investors, protecting insurance companies from getting wiped out by a single event.

The potential for calamitous natural disasters such as wildfires or hurricanes already has led some insurance companies to claim they had to stop writing homeowners’ policies in some markets or abandon them entirely.

“Insurance prices would be much higher today without cat bonds,” said Robert Hartwig, who directs the Center for Risk and Uncertainty Management at the University of South Carolina.

The big risk for investors is a major U.S. hurricane. That’s what drives the cat bond market. About 70 percent of the risks covered by the $56 billion in cat bonds outstanding worldwide are tied to damage from named storms slamming into places such as Texas or Florida. The potential for crushing losses is so great that these bond sales mostly shut down during the Atlantic hurricane season, running from June 1 to Nov. 30. Instead, the cat bond world spends its time watching what’s brewing out at sea.

“The Weather Channel is the one you have on in the background,” said Philipp Kusche, global head of insurance-linked securities at Howden Capital Markets and Advisory. “It’s fingers-crossed time.”

The National Oceanic and Atmospheric Administration had predicted an above-normal season with 13 to 18 named storms and 2 to 5 major hurricanes, but it’s been quiet so far. Hurricane Erin failed to reach the United States in August. This week, Hurricane Gabrielle was being tracked as it passed near Bermuda.

The cat bond market was created in response to Hurricane Andrew, which was the costliest U.S. hurricane in history when it hit South Florida in 1992, causing about $27 billion in insured losses. At least 16 insurers were driven into the ground by the storm.

That is when insurers realized they needed new sources of funding. One of the first cat bond deals arrived in 1997, organized for the USAA insurance company, a $500 million offering that protected the insurer for one year from losses greater than $1 billion from a single Category 3, 4 or 5 hurricane along the East Coast.

The cat bond market grew steadily for years and then exploded after Hurricane Katrina hit New Orleans in 2005, the costliest natural disaster in U.S. history. These are mostly purchased by institutional investors, although some exchange-traded funds have exposure to them.

Over the past decade, the cat bond market has nearly tripled, according to Artemis, which tracks insurance-linked securities. Most of these deals are centered on climate disasters. But there are also smaller cat bonds that cover cyber risk and terrorism. Life insurance companies offer extreme mortality bonds to cover mass death events. The Danish Red Cross sponsored a small cat bond in 2023 tied to eruptions at 10 different volcanos as a way to pay for aid delivery should lava flow.

Investors scored a 17.3 percent average return last year and 19.7 percent in 2023, according to the Swiss Re Cat Bond Total Return Index. So far this year, the average yield is about 10 percent.

But the average return was -2.2 percent in 2022, thanks in part to Hurricane Ian making landfall in Florida in September of that year as a Category 4 storm. Ian caused an estimated $54 billion in insured property losses, according to estimates.

Nothing spurs interest from insurers in cat bonds like a pricey disaster.

Just weeks after the Southern California wildfires in January torched more than 15,000 homes and buildings, California FAIR plan, the state’s insurer of last resort, said it would look into cat bonds “to further enhance its ability to pay claims in the event of future disasters.”

Today, U.S. hurricanes are considered the best understood disaster risk thanks to intense modeling built on decades of data about what happens when these storms make landfall. Both sides in a cat bond deal have a good idea of what they’re getting into.

It’s harder with so-called secondary perils, such as severe storms and hail, flooding or even forest fires. These events are harder to predict, so investors tend to want a bigger return for shouldering the risk, said Jean-Louis Monnier, head of insurance-linked securities at Swiss Re, one of the world’s largest reinsurance firms.

The California wildfires and large thunderstorms in the Midwest made the first six months of 2025 the second costliest half-year period on record for catastrophe losses, reaching $80 billion, according to a Swiss Re report.

The average property insurance premium has jumped 70 percent nationwide since 2000, according to the ICE Mortgage Monitor Report. Although experts say it would be higher without cat bonds, most of the increase is because people keep moving into hurricane-prone parts of Florida and Texas, as well as earthquake-prone areas in California. The average size of a U.S. home is also larger than in the past. And inflation has pushed up the cost of replacement building materials.

If Hurricane Ian had hit during the 1970s, insured losses would have been half or even a third less expensive, according to a Swiss Re report.