Deepening cat bond market offers investors liquidity, scale, and broader diversification: GAM’s Aviv

The catastrophe bond market has reached a scale where its continued growth actively reinforces the investment case, offering greater scalability, improved liquidity and broader scope to diversify within natural catastrophe risk, according to Dr. Rom Aviv of GAM Investments.

Aviv, who is well-known across the insurance-linked securities (ILS) industry, joined GAM Investments as Head of ILS in April 2025. 

In a recent article authored by Aviv, the executive states that while natural catastrophe events are unpredictable, the behaviour of the cat bond market has historically exhibited a consistent pattern, one that underpins the asset class’s investment case.

“From February 2002 to March 2026, the Swiss Re Cat Bond Total Return Index generated an annualised return of 7.7% with annualised volatility of 3.7%. Over the same period, US high yield returned 7.1% with 8.8% volatility, while the S&P 500 returned 9.6% with 14.8% volatility. Correlations between cat bonds and major traditional asset-class indices remained at or below 0.26. The index has recorded only one negative calendar year since inception: 2022,” Aviv said.

“Cat bonds may resemble fixed income operationally, but not economically. Their principal source of risk is not the solvency of a corporate borrower, the path of policy rates or economic growth. Instead, investors are paid to absorb defined insurance losses arising from natural catastrophes. The result is a return engine that has historically exhibited relatively low sensitivity to many of the common risk factors embedded in traditional portfolios.”

Aviv continued: “That distinction matters because the stock-bond hedge depends on the source of the shock. In March 2020, equities and corporate credit sold off together as liquidity disappeared. In 2022, inflation and aggressive monetary tightening produced simultaneous calendar-year losses for both US equities and the Bloomberg US Aggregate Bond Index. IMF research published in February 2026 noted that stocks and bonds have increasingly tended to sell off together during market stress since 2020.”

Importantly, while cat bonds can also experience drawdowns too, the key difference is what drives the losses: insured catastrophic events, as opposed to factors such as profitability fluctuations, financial leverage, interest rate sensitivity, or macroeconomic cycles.

Moreover, as the cat bond market continues to further expand, a key trend that has helped drive this momentum is how comfortable sponsors have become with the mechanics of the overall cat bond space, and it’s this familiarity that has ultimately encouraged a wave of new sponsors to venture into the space.

Cat bond issuance in H1 2026 hit a new high of almost $18 billion, up on last year’s previous record of $17.6 billion. The period also set issuance records for 144A property cat and total 144A issuance at $17.3 billion and $17.7 billion, respectively.

With the outstanding catastrophe bond market reaching $65.6 billion in H1 2026, it’s increasing depth is delivering benefits to investors.

“Repeat sponsors remain the backbone of issuance, but the universe continues to broaden across primary insurers, reinsurers, public-sector entities, geographies and perils. What began as a tactical solution has evolved into an established component of the global catastrophe risk-transfer market,” Aviv added.

Interestingly, Aviv further points out that some of the most compelling features of catastrophe bonds were not particularly designed for investors, and that they emerged solely because sponsors needed efficient, secure and capital-effective reinsurance protection.

Key amongst these is that cat bonds provide floating income with limited duration.

“The coupon generally has two components: a return on collateral and an insurance risk spread paid by the sponsor. Because the collateral is short-dated and resets with money-market rates, cat bonds behave economically more like floating-rate instruments than conventional fixed-rate bonds,” Aviv explained.

The executive noted that this feature was particularly valuable in 2022, where traditional bond portfolios suffered as yields rose and duration repriced. However, whilst this happened, cat bond investors managed to benefit from higher collateral income.

Aviv also acknowledges that most catastrophe bonds tend to mature around three years, commonly within a three-to-five-year range.

“Underlying insurance-policy risk periods are typically annual. That matters because catastrophe risk is not static: insured values change, models are recalibrated and the hazard itself evolves,” the executive said.

“Short maturities force the market to re-underwrite and reprice risk continuously. Investors are not locked for a decade into assumptions made at issuance. Major events have historically been followed by higher risk spreads and tighter available reinsurance capacity; a short-dated market allows investors to access that repricing quickly.”

Aviv added: “The market has reached a scale where its continued growth is supporting the investment case. The outstanding market reached roughly USD 65.6 billion in June 2026 after another record first half of issuance. As the market deepens, three benefits follow for investors: greater scalability, better liquidity and more scope to diversify catastrophe risk itself.”

Regarding scalability, Aviv notes that cat bond allocations that were difficult to implement a decade ago are increasingly practical today. This is demonstrated by UCITS cat bond funds managing to surpass $21 billion in assets in July 2026, while sponsor adoption continues to broaden.

The executive also added that regular primary issuance and a broader manager and investor base helps create more two-way flow, more observable pricing and stronger valuation discipline across the asset class.

The cat bond market also continues to broaden and expand from its main source of risk, that being US hurricane risk, with issuance broadening across earthquake, wildfire, severe convective storm, flood, European and Asian perils, as well as non-natural risks such as cyber.

“A Florida hurricane, a Japanese earthquake and a European windstorm have different physical drivers. A broader universe therefore allows managers to diversify catastrophe risk itself, not merely diversify away from financial-market risk,” Aviv said.

Concluding: “Cat bonds remain a specialist asset class. They carry real tail risk, model risk and event-driven liquidity risk. But after almost 25 years of observable performance, the central thesis has remained broadly intact: investors have historically been compensated for bearing a risk whose fundamental driver is largely independent of the macroeconomic risks embedded in most traditional portfolios. That has become increasingly difficult to replicate with traditional fixed income alone

“While natural catastrophes will remain unpredictable, the behaviour of a well-diversified portfolio of cat bonds may be considerably less so.”