Is California's Wildfire Bond A Missed Opportunity?

California’s insurer-of-last-resort has just pulled off a Wall Street first.

In December, the state’s FAIR Plan Association locked in US$750mn of reinsurance protection through a catastrophe bond, the largest ever sold that is exposed purely to wildfire risk. The FAIR plan says the deal will help pay out future disaster claims and lower the likelihood it needs to call on private insurers to help cover its obligations.

It also underlines the growing popularity of catastrophe (or ‘cat’) bonds as a way to package and shift climate risks around the financial system, enhancing the financial resilience of insurers in the bargain. This is borne out by the bond’s pricing. Money managers clamored for a piece of the action, pricing the bond at the bottom of its final guidance. Holders will be paid a 9.75% spread, roughly 11% lower than the midpoint of initial pricing. That tightening came even after California’s worst-ever wildfire disasters — the Eaton and Palisades fires in Los Angeles.

But to some, the bond represents at best a missed opportunity for the FAIR Plan to become a pioneer in resilience financing, and at worst a costly boondoggle that does little to support hard-hit policyholders.

“The question — and I don’t know the answer to this – is whether this is the best way to fill a gap that needs to be filled to protect policyholders, or is it just a way for insurers who control the FAIR plan to protect themselves from an unlikely assessment … by foisting extra premium on to policyholders?” asks Douglas Heller, Director of Insurance at the Consumer Federation of America.

The FAIR Plan’s cat bond, Golden Bear Re Ltd., is the latest in a series of large dollar deals designed to protect insurers, reinsurers, and even governments from at least some of the losses inflicted by climate-related disasters.

Cat bonds first emerged in the 1990s as a way for insurers to offload disaster risk to capital markets players. For years, the market grew steadily, waxing and waning in response to the capacity of the traditional reinsurance market. This pattern changed in the past five years.

Global issuance hit a record US$25.6bn in 2025, up sharply from US$17.7bn the year before, according to Artemis, a cat bond intelligence platform. Outstanding cat bonds now total about US$61.3bn, most of them short-dated instruments with maturities of two to four years and almost all denominated in US dollars.

That sounds big — until it’s stacked against the scale of climate losses. Global natural disasters caused an estimated US$224bn in losses in 2025 according to Munich Re, of which just US$104bn was insured. Even after its recent growth spurt, the cat bond market would need to expand many times over to materially close that protection gap.

Still, the momentum is undeniable. Both supply and demand factors are at play here. Investors want exposure to risks uncorrelated to equity and debt markets, while insurers are scrambling for alternative sources of capital so that they can continue to write business in hazard-prone areas.

WILDFIRE’S BIG BREAKTHROUGH

The successful placement of Golden Bear Re itself is testament to this evolution. Before this issuance, wildfire had historically been overlooked by this market. That is starting to change.

Prior to the FAIR Plan’s issuance, only about US$350mn of pure wildfire cat bonds were outstanding. Now, that figure is up to roughly US$1.1bn — by far the highest level ever for the peril, though still dwarfed by issuances for hurricane, earthquake, and multi-peril bonds.

The FAIR Plan’s own growth explains Golden Bear Re’s US$750mn size. As of December, the insurance pool’s total exposure came to near US$724bn, up 58% from September 2024 — before the LA fires. This increases its need for reinsurance support. Private carriers are also growing their business in certain pockets of the state, partly encouraged by new risk-mitigating regulations introduced by the California Department of Insurance. Besides Golden Bear Re, three other wildfire-focused bonds were placed in 2025, offering protection to private insurers and a utility.*

However, size isn’t the only factor that determines how useful a cat bond is to an insurer’s financial resilience. Just as important are the conditions that trigger a payout — and the threshold of losses at which it “attaches.” Artemis reports that when first marketed, Golden Bear Re would attach at US$6bn of losses, paying out on a per-occurrence basis — meaning in the event of a single wildfire event, rather than for multiple events over a certain time horizon. This is a high threshold, meaning the bond’s capital would only unlock after a truly apocalyptic wildfire event. For context, the FAIR Plan says it has paid out nearly US$3.5bn for the Eaton and Palisades fires so far. The two conflagrations were the costliest wildfires on record globally, incurring US$41bn in insured losses, according to insurance broker and risk consultancy Aon. 

The scale of the inferno required to trigger Golden Bear Re is reflected in its low expected loss probability, of just 2.24%. Put another way, the bond is envisaged to trigger only in the event of a one-in-45-year firestorm. Moreover, the bond matures in 2028, providing only three years’ worth of protection.

This has irked consumer advocates like Heller.

“From what I can tell, the risk of loss to these cat bondholders is lower than that of a junk bond, which have default levels in the range of 4% these days, compared with [Golden Bear Re’s] expected attachment probability of 2.58%. But the spread on these is better than for junk bonds, which are hovering around 6.5%,” he says.

“The FAIR plan should be asked to explain why selling high-yield bonds for this piece of the wildfire risk is a good deal for policyholders, because it is not entirely clear that it is,” he adds.

Investors aren’t grumbling, though. The upsizing of the bond from an initial ceiling of US$250mn to US$750mn shows just how strong institutional appetite is for this kind of climate risk. And while heavy demand pushed the coupon down a bit, 9.75% is still more generous than what investors can get from most high-risk corporate debt.

Why did this bond cause such a feeding frenzy? “Investor engagement was driven by several factors: clearer, more mature wildfire modeling, the indemnity structure and transparent approach the sponsor brought to market and a broader search for diversification as investors look beyond traditional climate catastrophes,” says Chris Lefferdink, Head of North America Insurance-Linked Securities (ILS). Aon Securities structured and coordinated the sale of the FAIR Plan’s bond.

The strong performance of cat bonds like Golden Bear Re — which on some risk-adjusted measures have delivered stronger returns than even US equities — has two important implications. First, it suggests investors are still being paid more for catastrophe risk than losses alone would justify. Second, those excess returns are likely to draw in more capital, deepening the market and allowing insurers to diversify climate risk more effectively.

Investor comfort with improved climate risk data and tools could also be a driver.

“The recent wildfire activity in the state has led to much-needed improvements in wildfire modeling and in our understanding of the current wildfire risk in the state overall. As such, investors are in a better position than ever to set an upper bound on the risk,” says Joanna Syroka, Director of New Markets at Fermat Capital Management, an investor in cat bonds and other ILS.

While wildfire-specific cat bonds are still a novelty, some observers argue the FAIR Plan missed an opportunity to be bolder — structuring the bond to incentivize statewide wildfire resilience, rather than just provide plain old reinsurance coverage.

The contrast with a recent US$600mn issuance by the North Carolina Insurance Underwriting Association (NCIUA) — that state’s insurer-of-last-resort for coastal properties — is instructive. While the FAIR Plan’s wildfire bond is paying for raw capacity, the NCIUA bond is engineered to strengthen resilience as much as absorb losses.

For every year in which a disaster doesn’t strike — specifically, a major storm — the structure pays some US$2mn back to the NCIUA, reserved for incentivizing policyholders to harden their roofs against storm damage. As more of these roofs go up, so the insurance pool’s exposure to storm losses goes down. In other words, where California’s bond is about surviving the next fire, North Carolina’s is about making the next storm less costly in the first place.

While the resilience component of NCIUA’s bond is modest — the pool covers hundreds of thousands of policyholders, and storm-hardened roofs cost about US$3,400 more than standard ones, meaning the annual US$2mn won’t stretch far — it’s still an innovation some argue California should have adopted.

“The FAIR Plan should establish a home hardening program like that established by the North Carolina residual market … which would then enable the FAIR Plan to issue a resilience cat bond like that recently issued by NCIUA,” says Dave Jones, Director of the Climate Risk Initiative at the University of California, Berkeley, Center for Law, Energy and the Environment, and former California Insurance Commissioner.

“The FAIR Plan sadly is far behind in this regard,” he adds.

*Correction: An earlier version of this article stated there had been two additional wildfire-specific cat bonds issued in 2025. The correct number is three.

Thanks for reading!

Louie Woodall
Editor