As the catastrophe bond market continues to expand, these particular financial instruments continue to offer a sustainable opportunity for investors, while interest in private insurance-linked securities (ILS) is increasing as investors seek to further diversify within the asset class, according to Chris McAvoy, Head of alternatives research at JANA Investment Advisers Pty Limited.
“Now the question for institutional investors isn’t whether to maintain cat bond exposure, it’s how to evolve it,” McAvoy said.
“Cat bonds remain a solid foundation and compelling entry point, but the private side of the insurance-linked securities (ILS) market has repriced more slowly, offering a logical extension for those open to reduced liquidity.”
Moreover, the last 18 months have seen a number of major natural catastrophe events take place, such as the January wildfires in California, major hurricanes Milton from 2024, and Melissa from this year’s Atlantic season, all of which have produced a series of mid-sized claims, adding to global insurance losses.
Yet for most cat bond investors, the outcomes were notably more benign, McAvoy explains.
“Standard cat bond portfolios typically avoid heavy exposure to large California wildfires and the Atlantic hurricane seasons was, in practical terms, relatively quiet. The losses that did occur were absorbed lower down the insurance tower by primary insurers and traditional reinsurers, leaving cat bond investors largely untouched.
“Meanwhile, new cat bond offerings came with attractive terms, meaning most investor portfolios sat above the activity that made the headlines. The limited losses of 2025 confirmed a trend we previously noted, with issuances shifting higher in the tower and increasingly designed to focus on carefully modelled risks.”
Further into the article, McAvoy acknowledges how cat bond yields remain attractive in absolute terms, retaining their unique edge of being linked to specific natural cat risks, instead of the economic cycle.
According to McAvoy, it is that unique edge that makes cat bonds a strong core holding in a diversified portfolio and an ideal introduction to the ILS market.
However, McAvoy notes that while the broader ILS market remains attractive, “not all corners of the market have adjusted at the same pace.”
“Public cat bonds are the most visible and accessible segment, meaning they’ve absorbed the bulk of post-2023 capital inflows and pricing has normalised accordingly. Private ILS, by contrast, has re-priced more gradually – creating a new edge and opportunity for investors,” McAvoy explains.
According to McAvoy, the appeal of private ILS is centered around three key factors.
Firstly, private ILS provides slower capital inflows.
“Because liquidity is tied to biannual renewal cycles (January and July) and capital can be temporarily held during loss settlements, this structure deters short-term funds. This leads to less competition, allowing pricing to hold firmer,” McAvoy writes.
As well as this, private ILS can access a wider mix of programmes and geographies, which reduces the heavy concentration in US wind and earthquake risks that typically tend to dominate public cat bonds.
In fact, European wind, Japanese typhoon, multi-peril quota shares and certain specialty lines are more commonly accessed privately, and as McAvoy explains, this helps make private ILS a useful complement to a liquid cat bond sleeve because it reduces concentration in US peak perils.
And lastly, McAvoy stresses how private ILS provides a more efficient use of capital.
“Many private ILS contracts are not fully collateralised. The investor posts capital up to a high-confidence loss level and the (re)insurer’s balance sheet stands behind the tail. In practice, an investor may fund only a portion of the limit but earn premium on the whole insured amount. The same capital therefore earns more. Public catastrophe bonds are fully collateralised by design, so they do not offer this leverage,” he explains.
Looking ahead to next year, McAvoy affirms that by late 2025, “the cat bond market has transformed a post-2022 reset into a sustainable opportunity, tested through actual events.”
“It still offers compelling no loss yields of c.9-10 per cent and serves as the most straightforward ILS entry for newcomers.
“But with public markets absorbing capital rapidly, private ILS now offers relative value. For those with positive cat bond experiences, the key 2026 conversation is capturing more of that private opportunity set,” McAvoy concludes.
