Rising insured losses from severe convective storms in the United States like hail and tornadoes could drive further growth in the catastrophe bond market, a sector largely structured through Bermuda special-purpose insurers.

A report by Acrisure Re said severe convective storms have become a major source of insurance losses and are increasingly being transferred to capital markets through catastrophe bonds.

“A catastrophe bond is a security issued — typically through a Bermudian special-purpose insurer — on behalf of a sponsoring re/insurance company,” the report said.

It added that the peril has become a major focus for investors, with severe convective storms now featuring in about one-quarter of cat bond issuance since 2017.

Insured losses from the storms — which include hail, tornadoes and severe thunderstorms — reached nearly $200 billion globally between 2020 and 2024, about 2.5 times higher than the previous five-year period.

The report said severe convective storms — which include hail, tornadoes and damaging wind events — have become one of the most significant non-peak catastrophe perils for insurers.

“Severe convective storms have become a defining catastrophe peril for today’s insurance markets,” the authors wrote, noting that the long-term trend in insured losses from the events “is unequivocally upward”.

Although scientific studies show that the frequency of stronger tornadoes has not necessarily increased, the financial impact of storms has grown sharply because of rising property values, population growth in exposed areas and higher costs to rebuild.

As losses increase, insurers are turning more frequently to capital markets for additional protection. Catastrophe bonds — which transfer risk from insurers to investors — typically provide multiyear coverage and are fully collateralised.

Investors are increasingly willing to assume the risk because their portfolios are generally less concentrated in the US Midwest than those of traditional reinsurers, according to the report.

Advances in catastrophe modelling are also helping insurers and investors better assess the risk. Modern models now use high-resolution radar data, better atmospheric data sets and expanded claims histories to produce more accurate estimates of potential losses.