A new report from Fitch Ratings has suggested that insurance-linked securities (ILS), catastrophe bonds, and parametric insurance solutions can help re/insurers innovate in order to balance the conflicting goals of expanding access to affordable natural catastrophe cover, without impairing underwriting principles.
The agency said that it expects losses to increase over the medium-to-long term, driven by more frequent and more severe nat cat events linked to wildfires or extreme precipitation.
“Innovative forms of nat cat protection, such as microinsurance, parametric covers and insurance-linked securities (ILS), could be part of the solution. These forms of protection improve access to insurance and reinsurance covers and tap into additional capital sources. However, their adoption is limited in size and geographical reach,” Fitch explained.
In its report, Fitch explained there is a constant development being seen across the market for risk-transfer solutions, such as ILS, for peak risks, as well as improved nat cat modelling.
Importantly, the agency highlights that reinsurers are particularly pivotal due to their high level underwriting experience, their ability to sometimes run their own nat cat models, and the fact that they have strong access to the capital markets.
“They not only provide capacity to cedents, but also advice on best-practice underwriting. In addition, they increasingly act as originators of ILS, bridging the gap between insurance markets and institutional investors,” Fitch said.
Fitch also emphasises how the catastrophe bond market has continued to expand throughout the years, and how more re/insurers and sovereigns across the globe are turning to the capital markets to expand their nat cat protection.
The cat bond market has already had a memorable 2026, with momentum accelerating through the second-quarter, and breaking many records, with more than $11.3 billion of new risk capital analysed and tracked in the period, making Q2 2026 the biggest single quarter in the history of the cat bond market, according to Artemis’ new quarterly catastrophe bond market report.
Fitch also highlights regulatory frameworks, and the critical role they play towards narrowing the nat cat protection gap.
“Several jurisdictions have created regulatory frameworks for ILS to facilitate the issuance of cat bonds as an additional risk-transfer option for insurers. For example, Bermuda’s framework for the regulation and supervision of the ILS sector has resulted in steady growth in cat bond issuances, creating increasing capacity and available coverage for nat cat risks,” Fitch explained.
“In Hong Kong, a regulatory regime was established in 2021 to facilitate ILS, creating a framework for special-purpose insurers. More recently, the UK moved forward its planned reform of risk-transformation regulations, easing funding requirements and enabling a more flexible authorisation process for ILS.”
Fitch’s report underscores that addressing the growing protection gap will require the industry to look beyond traditional capacity.
By blending reinsurer expertise with supportive regulatory frameworks, the market can steadily scale solutions like ILS, cat bonds, and parametric insurance, effectively drawing in new capital to help close the global protection gap while maintaining disciplined underwriting principles.
