Insurance-linked securities (ILS) are back in focus for institutional investors, with catastrophe bond issuance at record levels and returns still higher than in the pre-2020 period, according to a December 2025 implementation insight from consultancy bfinance.
The firm also warns that mandate design and manager selection remain decisive after the missteps that affected performance between 2017 and 2022.
bfinance’s assessment aligns with broader market data indicating that ILS capacity has expanded materially in 2025, with issuance exceeding US$18 billion by the end of the third quarter and the outstanding ILS market estimated at about US$56 billion, according to Artex Risk.
Years of elevated catastrophe activity, trapped collateral and underperforming funds exposed gaps in risk models, portfolio construction and deal terms. Since 2022, stronger pricing, higher interest rates and revised structures have supported improved cat bond outcomes and drawn new and returning capital into ILS strategies.
bfinance’s paper urges allocators to frame ILS portfolios primarily through a risk lens rather than fixed return hurdles. It points to expected loss as the core risk anchor, often supplemented by tail measures such as 99% Value at Risk, to define risk appetite and compare strategies.
Typical cat bond-focused approaches may work to an expected loss band of 2% to 3%, while more aggressive portfolios with larger allocations to private ILS can accept expected losses of 5% to 6% or above. These higher-yielding strategies carry materially larger modelled tail losses, which the consultancy says must be understood and tested before allocation.
Liquidity is described as a central design variable for ILS mandates. Portfolios concentrated in listed catastrophe bonds can often support daily or frequent dealing, while strategies with substantial exposure to private collateralised reinsurance may need longer notice periods, lockups, gates and slow-pay mechanisms to reflect underlying settlement timelines.
bfinance cautions that investors should not plan on full redemption in under a year where private ILS forms a significant share of the portfolio. Aligning liquidity terms with risk, event development and collateral release patterns is seen as critical to avoiding forced sales or unexpected gating.
The report also lays out a suite of constraints and limits that asset owners can use to shape risk, including caps on niche instruments, peril-specific limits informed by contribution to expected loss, diversification by cedant and trigger type, and controls on specialty lines, aggregate structures and leverage.
On implementation, it weighs the merits of pooled funds, funds-of-one and separately managed accounts, noting that SMAs in this specialist segment can involve greater operational and documentation complexity.
Fee structures and ESG integration feature as further design considerations, particularly for larger insurance and pension investors. bfinance notes that success in ILS is more likely where mandates are pragmatic and calibrated to investor objectives, balancing risk control, liquidity, customisation and manager breadth as institutions step back into an asset class reshaped by the experience of 2017-2022.
