KBRA Report Examines Growing Role of Catastrophe Bonds in Insurer Capital Strategy

Kroll Bond Rating Agency (KBRA) has released a report, Catastrophe Bonds and Insurer Credit Profiles: A Ratings Perspective, examining how catastrophe bonds (CAT bonds) are increasingly used within insurers' risk and capital management frameworks. The report evaluates CAT bonds primarily through the lens of balance sheet resilience, earnings stability, and claims-paying ability, according to the report.

CAT bonds are insurance-linked securities that transfer low-frequency, high-severity risks—such as hurricanes, earthquakes, pandemics, or other systemic perils—from insurers to capital markets investors, according to KBRA. Typically issued through special-purpose vehicles and sold to qualified institutional buyers, the securities allow insurers to access alternative sources of capacity alongside traditional reinsurance, per the report.

According to the report, CAT bonds can help reduce tail-risk volatility, support capital adequacy, and enhance earnings stability when appropriately structured within a broader reinsurance program. KBRA said these securities are generally viewed as a complementary form of risk transfer that can mitigate the severity of extreme loss events and reduce reliance on traditional reinsurance markets during periods of market dislocation.

From a financial strength perspective, CAT bonds are most relevant for their ability to limit extreme downside risk and protect insurer capital following large catastrophe losses, according to the report. KBRA noted that different trigger structures—such as indemnity, industry loss, parametric, or modeled loss triggers—introduce varying credit considerations related to payout timing, basis risk, and alignment with underlying exposures.

CAT bond issuance has expanded significantly in recent years. According to KBRA, annual issuance exceeded $25 billion in 2025, with outstanding market volume surpassing $61 billion and deal activity reaching a record 122 transactions.

The report notes that while property catastrophe risk continues to dominate the market, issuance tied to nonproperty exposures—including cyber and mortgage risks—exceeded $1 billion in 2025. This expansion reflects broader interest in using insurance-linked securities to address a wider range of risks, according to KBRA.

Investor demand has supported the market's growth. The combination of higher interest rates and stronger reinsurance pricing since 2022 improved CAT bond yields and contributed to increased investor participation, according to the report.

Although insurance risk spreads moderated in 2025, overall returns remain attractive relative to historical norms. KBRA said consistent expected loss levels of approximately 2 percent over the past decade indicate disciplined risk pricing and support the sustainability of the asset class.

CAT bonds also provide diversification benefits for investors because returns depend on the occurrence of specific catastrophe events rather than broader economic cycles, according to KBRA. As a result, the securities are generally viewed as largely uncorrelated with traditional financial assets.

The report estimates that CAT bonds represent roughly 15 percent of total global reinsurance capacity when combined with other forms of alternative capital, such as collateralized reinsurance and sidecars. Since 2022, alternative capital in the reinsurance market has increased by roughly one-third, with CAT bonds serving as a primary contributor, according to KBRA.

From a credit perspective, KBRA noted that diversified access to alternative capital can be supportive for insurers with significant catastrophe exposure. However, the report emphasized that alternative capital does not replace the need for strong underwriting discipline, conservative reserving, and robust capitalization.

Looking ahead, CAT bonds are expected to remain an important component of catastrophe risk management programs. Outstanding CAT bonds have more than doubled since 2016, and with nearly $15 billion of bonds maturing in 2026, issuance is expected to remain active, according to KBRA.