Recently, our own Ethan Powell, principal and CIO of Brookmont and portfolio manager of the Brookmont Catastrophic Bond ETF, sat down with Insurance Business to discuss an important topic: how catastrophe bonds are impacting the insurance affordability crisis.
We believe this is a very timely conversation. When we think about cat bonds within the context of affordability, cat bonds play two critical roles: one for cat bond investors, and the other important for consumers and property and business owners. Let’s take a closer look.
First, the US market has been experiencing an affordability crisis across virtually all insurance categories - from health, home, and auto to, of course, property and other economic losses related to climate-related disasters. To provide context, the average cost of home insurance is expected to rise another 4% in 2026, to over $3,000 annually, for the fifth year in a row according to Insurify’s 2026 Insuring the American Homeowner Report. This is a significant increase for homeowners to stomach, especially when compared to the reality that homeowners were, on average, paying roughly $900 a year for their home insurance in 2021.
Digging deeper, it’s clear that premiums are rising in areas most likely to experience some form of natural disaster. The Midwest and Great Plains regions have experienced increases of over 35% since 2023, after consecutive years of storms producing high winds, hail and even tornadoes that incurred repeated losses for carriers. California, a hot bed for wildfire and earthquake activity, is projected to have the largest increases in 2026, expecting annual homeowner insurance costs to be nearly 16% more expensive than in 2025. Florida a state that is at high risk for losses during the Atlantic hurricane season (perils that make up a large portion of cat bond market) continues to report the highest home insurance costs in the country at nearly three times the national average.
Premiums are on the rise, and consumers are feeling the squeeze. However, we believe cat bonds could offer some relief.
Cat bonds expand the amount of risk capital available to insurers. So rather than insurers and reinsurers shouldering all the risk of losses related to climate events, continuing to be overwhelmed and raising prices, these companies can pass some of that exposure to global capital markets. This added capacity can help stabilize premiums, especially after major disasters when traditional reinsurance becomes more expensive. It also means they’re likely to maintain coverage in high-risk areas where they otherwise might be tempted to withdraw.
In one clear example, after Hurricane Ian in 2022, Florida’s insurance market was under severe stress. Reinsurance prices surged, and homeowners saw steep increases of around 40% the following year. However, catastrophe bonds tied to hurricane risk helped inject some additional capacity into the market, which gave insurers more flexibility in managing their exposure. Without that alternative capital, the price spike in some areas could have been even worse. As the amount and severity of devastating natural events increases, cat bonds could continue to
help offset premium price increases for property owners and help insurers and reinsurers absorb more risk and issue more insurance at lower costs to consumers.
For investors, this signals more opportunities, with more cat bond issuances (and improved pricing) as reinsurers increasingly consider cat bonds as valuable tools to offset potential financial losses after a devastating event. In fact, 2025 was the biggest year for cat bond issuance growth, with the total calendar issuance reaching a staggering $61.3B market by year end. Industry analysts believe that trend is expected to persist in 2026. We believe this activity could also benefit current cat bonds investors where new issuance might offer higher yields.
Cat bonds have changed the reinsurance market for the better. For consumers, their existence could potentially offer some relief from rising premiums and more competition in the insurance marketplace. For investors seeking opportunities that might provide portfolio diversification and
generate yield, we believe cat bonds might be an attractive investment opportunity. We look forward to seeing how cat bonds will continue to influence insurance affordability in 2026.
Sources:
Insurance Business Magazine
WUSF/NPR
Brookmont