Insurers are turning to catastrophe bonds to pass on historic levels of wildfire risk to the capital markets.

Issuance of cat bonds that include exposure to wildfires has already soared to more than $5 billion so far this year, according to data published on Monday by industry specialist Artemis. That’s approaching the record amount sold during all of 2025, which was roughly double the level issued the previous year.

Though the market remains dominated by California, insurers and investors interviewed by Bloomberg say Europe will inevitably need to explore ways to transfer wildfire risks to private investors. That’s as the fastest-warming continent struggles with increasingly frequent and devastating blazes.

Catastrophe bonds are designed to help insurers offload unmanageable risks to the capital markets. Investors can be on the hook if a predefined catastrophe hits, but stand to make money if it does not.

Wildfire risk is now the fastest-growing category of natural-catastrophe peril globally, with insured losses rising roughly 12 per cent a year, according to KatRisk, a risk modelling firm. At the same time, investors are getting more comfortable with the financial models being built to map out such risks.

“The key enabler is robust risk quantification,” said Tyson Vickery, managing director and global placement leader for Europe at Marsh, the world’s largest insurance broker. “Investors need confidence in the underlying hazard data and catastrophe models.”

In Europe, insurers say it’s still too early to estimate how much damage this season’s fires have caused. The region also has a long way to go before its cat bond market catches up with that in the US, says Will Bruce, global head of climate risk consulting for Aon.

“Whether a specific market develops around European wildfire risk will depend on a range of factors, including exposure growth, demand for protection, investor appetite and continued advances in modelling and analytics,” he said.

“Wildfire modelling in Europe is advancing,” said Mr Vickery. But “it is still less mature than in markets such as California”.

The rise in issuance of wildfire-linked cat bonds coincides with growth in sales overall. Last year, a 45 per cent surge in new issuance pushed the total outstanding market size to an unprecedented $61 billion, with hurricane risk remaining by far the dominant category.

Balz Grollimund, head of catastrophe perils at Swiss Re, says while there’s growing interest in transferring wildfire risk to capital markets, “the absolute risk for the insurance industry is still small compared to global peak risks that are typically covered by cat bonds”.

At the same time, the prospect of continually rising temperatures means wildfires will likely become a more frequent and destructive category of natural catastrophe. And though investors taking on exposure to the risk have so far tended to do so via bonds for which wildfires are part of an array of perils, stand-alone wildfire exposure is becoming more common.

The fires that devastated the greater Los Angeles area in January 2025 destroyed more than 16,000 buildings and caused a record $40 billion in insured losses.

With the non-renewal of more than one million wildfire policies in recent years, reliance on the state-backed California Fair Plan has surged. The plan’s exposure has grown significantly, including by over 50 per cent in Los Angeles County alone between 2024 and 2025. It entered the cat bond market last year.

Wildfire cat bonds pose a number of modelling challenges. Predicting the path and timing of a fire requires the ability to accurately map and forecast temperature levels, vegetation growth and wind speeds, as well as local topography. It’s also one of the few natural disaster categories where human intervention — such as cutting back dense and dry vegetation early in the season — can materially alter a bond’s risk metrics.

Dirk Schmelzer, a senior fund manager at Plenum Investments AG, says wildfires are now a sufficiently large peril for the risk to be placed “on a stand-alone basis”. At the same time, Verisk and Moody’s are among firms unveiling risk models that are giving investors more to work with.

Acrisure Re, a reinsurance broker, says that while wildfire models had tended to “systematically” underestimate wildfire risk in the past, they now increasingly incorporate more up-to-date fire data and climate trends, making them more reliable.

From an insurance-linked-security perspective, “the impact of better modelling is profound”, Acrisure said in a report. “This outcome is feeding back into pricing: sponsors with good data and prudent structures are finding receptive investors, whereas poorly understood wildfire risks would still face a high cost of capital”.