A new report from Gallagher Securities, entitled Insurance-Linked Securities (ILS), explains how the instruments work and examines the market for catastrophe bonds (cat bonds), the most well-known form of ILS.

“ILS have become increasingly mainstream both as a source of risk transfer capacity for sponsors (the protection buyer is referred to as the sponsor) and as a source of diversification for capital market investors,” the report’s researchers write. “Cat bonds provide collateralized (re)insurance, usually protecting against low-frequency/high-severity natural catastrophe events and are increasingly used by insurers and reinsurers to complement traditional reinsurance as an additional source of capacity.”

They continue the explanation, saying three-year terms are typically the most common. “They usually have a size of $100-million to $400-million (figures in U.S. dollars), although the market will sometimes support deals worth $1-billion or more.” 

In Canada, the first-ever cat bond solely exposed to Canadian perils was sponsored by TD Insurance in January 2025, giving TD Insurance $150 million in protection against earthquakes and severe convective storms, through Dec. 31, 2027. 

The report examines pricing, the market and its characteristics (large U.S. primary insurers drive the market, they say), and discusses payout triggers. Benefits and the perspectives of both sponsors and investors are also probed in the report.

A concentrated market 

“Although the investor base was initially slow to develop, today capital markets non-life insurance risk assets under management are significant and continue to grow,” the report states. They also add that the market is concentrated, with approximately 20 core investors driving the market. 

“The cat bond structure was originally designed to access generalist institutional investors,” they write. “As the asset class continues to gain scale, the pendulum may swing back towards generalist investors who may see value in developing in-house expertise, especially for cat bonds.” 

They conclude, saying non-life ILS capacity has grown by nearly 480 per cent since 2010. “We expect the market will continue to grow, as ILS are increasingly considered as an integral component of companies’ risk transfer programs.”