Cat Bond Market Expands as Growth Moderates in 2026

The insurance-linked securities (ILS) market is expected to continue expanding in 2026, though at a slower pace as investors take profits amid a softening market, according to a new AM Best report.

The report, Cat Bond Market Growth Accelerates as Loss Multiples Compress, finds that capacity in the ILS segment has reached record levels, reflecting its evolution beyond a niche market. Increased participation from returning sponsors and cedants, along with investor demand for diversification and returns, has supported this growth.

"This growing market is giving investors more opportunities to invest, and it's also diversifying in terms of including more risks based across perils and geographies," said Emmanuel Modu, managing director, AM Best.

Data compiled by AM Best and Guy Carpenter shows the ILS market reached $120 billion at year-end 2025, up from $107 billion a year earlier. The 144A property catastrophe bond (cat bond) segment accounted for $57 billion outstanding, representing nearly half of total market capacity and an increase of nearly $12 billion year over year.

Rising reinsurance demand continues to underpin the market, driven by expanding insured exposures and increasing frequency and severity of natural disasters linked to climate change. At the same time, a softening cat bond market has prompted investors to reassess strategies to maintain returns.

"Investors are allocating capital in line with their risk-return objective," said Wai Tang, senior director, AM Best. "Some focus on risk-remote layers and accept lower yields in a soft market, while others seek higher returns or broader risk exposures by supporting lower-attachment transactions and private ILS deals, where yield compression has been less pronounced."

The report highlights strong cat bond activity in 2025, marked by high-profile transactions and broader participation across sponsors, perils, and geographic regions. This diversification signals continued maturation of the market and supports its long-term sustainability, as insurers increasingly turn to cat bonds for risk transfer.

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