The catastrophe bond (CAT bond) market around the world has grown steadily since 2016. In Canada, only TD Insurance has approached the market so far – in early 2025 and again in early 2026 it successfully sponsored two new CAT bonds providing TD with additional reinsurance capacity.

The January 2026 deal was a multi-year risk transfer of $115-million in aggregate protection against named storms, earthquakes, severe convective storms, winter storms and wildfires. The proceeds are invested in Canadian-denominated European Bank for Reconstruction and Development (EBRD) notes. The previous issuance, the first of its kind in Canada, provided TD with additional reinsurance capacity through a multi-year risk transfer of $150-million in protection against earthquakes and severe convective storms. The proceeds are similarly invested.

At a recent webinar hosted by the Global Risk Institute, Cat Bonds as a New Frontier for Climate Risk Management, TD’s representatives, along with its advisors and institutional investors gathered to discuss the nascent market in Canada.

“The first transaction that was done did create a lot of discussion with other potential sponsors of these types of transactions. I think there was significant applaud of the pioneering efforts that they've done,” says Cory Anger, managing director of GC Securities.

She adds that the broad CAT bond mechanics remain the same in Canada as they do around the world, but adds that the first Canadian CAT bonds were created in a way that was thoughtful about the regulatory capital framework in Canada. “I think that historically has been part of the blocking point of folks having thought about it more meaningfully.”

In 2025, although insured losses came in lower than those recorded in 2024 – the worst year on record for extreme weather events and losses – it was noted as still being among the top loss years, historically.

“Institutions need new ways to move that risk. CAT bonds are really emerging as another tool to bring fresh capital into the system and help share those risks,” explains Yibo Bu, research associate in sustainable finance with the Global Risk Institute. “Investors like them because CAT bonds can provide relatively high returns,” she adds, noting that the instruments are also attractive for having low to no correlation with traditional investment product returns.

Unlike traditional insurance which is renewed every year, a CAT bond, she says, normally has a term of three to five years. Historically, only three per cent of CAT bonds have paid out during qualifying events – the products are designed and issued to protect against rare and high severity disasters, rather than those frequent and smaller scale losses, she adds. 

Product risks include the fact that climate risks can be underestimated, CAT bonds are hard to value and there is limited liquidity for the instruments in the secondary market. “You cannot use a standard bond pricing model anymore. You need advanced catastrophe risk modelling, deep expertise and data that a lot of retail investors don’t have. This complexity limits the pool of participants to a relatively small group of specialists who can handle this kind of probabilistic analysis,” Bu says.

CAT bond markets expected to grow

Still, rising issuance and strong investor demand for diversification opportunities are helping to propel the market, alongside catastrophe risks that are rising faster than traditional insurance capacity can handle. “As climate-driven events intensify, CAT bonds are gaining momentum globally. They’re no longer niche, they’re becoming an important part of how markets think of transferring and sharing risks,” Bu adds. “From an investor’s point of view, CAT bonds can provide diversification benefits and long-term growth potential, but they definitely aren’t risk free. Understanding how they work is crucial.”

TD’s work during the presentation was noted as being pioneering. It was also noted as being instrumental in familiarizing global insurance linked securities (ILS) investors with insurance coverages and perils insurers face in Canada. Anger notes that differences in underwriting strategy and claims management here are nuanced when compared with other jurisdictions. “It’s a new dimension for ILS investors,” she says. “It was a perfect market environment in the ILS market to expand the perils covered and broaden investor’s knowledge of the Canadian insurance market.”

Debdatta Bose, associate vice president of reinsurance and corporate insurance with TD Insurance, says issuing the first and then second CAT bonds in Canada involved significant stakeholder education so that all parties understood the mechanism. “That is a complex process,” she says, adding that the first issuance was an opportunity to establish effective governance, while the second issuance allowed more nuanced discussions. These included conversations that had evolved from fundamental concerns about scalability and integration with the company’s broader insurance strategy and concerns about operational and reputational risk, to more detailed consideration given to the product’s structure and how it fit within the company’s larger goals.

Investors’ considerations

Jason Blumberg, CPP Investment Board portfolio manager, says the diversification that the product offers to traditional financial capital markets investments is one of the most attractive things about CAT bonds. He says this is generally the starting point for investors looking at the asset class. “It’s definitely something that we find very attractive,” he says. “You understand that you are taking on the risk of large events. So, you also want to be able to diversify then at the portfolio level to make sure that it’s not just one particular region or peril that you’re covering. There’s a lot of value as the number of participants in the market increases.”

To build that market, Bose says robust risk modelling and data transparency are both key. “If there is no modelling credibility, there is no repeatability. So one, preferably multiple modelling vendors should have a reliable, full suite of Canadian models for all different catastrophes. We know that does not exist currently. And if model credibility breaks, investor confidence decreases,” she says.

For those interested in following TD’s lead, Bose further recommends starting with a pilot deal to establish governance frameworks. “That is needed,” she says. “It’s a complex process.”