The Fundamentals

Catastrophe bonds (Cat bonds) have become a cornerstone of risk management in the global insurance and reinsurance markets. Cat bonds are a form of securitisation that allows insurers and reinsurers to transfer risk associated with catastrophic events to capital markets, providing insurers with essential capacity while offering investors attractive, non-correlated returns. Investors in Cat bonds are compensated with coupon payments, but the principal at risk may be partially or wholly forfeited if predefined triggering events occur, such as hurricanes, earthquakes, or floods. These triggers are often classified into three primary types:

• Indemnity-based triggers: Linked to the actual losses of the issuer.

• Index-based triggers: Based on an industry-wide or parametric index.

• Modelled loss triggers: Tied to simulated losses using catastrophe models.

In 2025, the importance of aggregated loss structures in Cat bonds has grown significantly due to the escalating frequency and severity of extreme weather events, as exemplified by the devastating wildfires in Los Angeles and the catastrophic floods in Valencia.

These events underscore the increasing relevance of aggregated loss structures, which allow insurers to address cumulative financial risks over time, rather than focusing solely on standalone catastrophic incidents.

So, what are Aggregated Loss Structures?

Aggregated loss structures define how claims from multiple loss events are combined during a bond's life to determine whether a payout is triggered.

Traditionally, Cat bonds have been designed around single-event triggers, such as an earthquake of a specific magnitude or a hurricane causing losses above a certain threshold. However, the rise in multi-event disasters, driven by climate change, has necessitated innovations in structuring these financial instruments. Aggregated loss structures have emerged as a critical adaptation, designed to address the cumulative impacts of multiple disasters over a bond's lifespan.

Aggregated loss structures define how losses from multiple events are combined to determine whether a bond’s payout conditions are met.

These structures are particularly relevant in the face of increasing "clustering" of disasters, where multiple events strike the same region in a short timeframe. For instance:

• The current and still ongoing wildfires in Los Angeles during 2025, driven by prolonged drought and extreme heat, caused widespread property damage and loss of life. While individual fires may not breach single-event triggers, their cumulative impact over a season could easily surpass aggregated thresholds, triggering payouts and providing crucial liquidity to insurers.

• Valencia’s catastrophic floods, attributed to record-breaking rainfall, are a classic example of successive disaster risks. The floods followed a series of severe storms, collectively overwhelming the region's infrastructure and insurance capacity (6). Aggregated loss structures would have captured these sequential losses, offering a more comprehensive risk-transfer mechanism.

• Hurricanes Helene and Milto in 2024 caused widespread destruction across the Caribbean and the southern United States, with cumulative insured losses exceeding $40 billion, according to Munich Re (“Natural Disaster Figures 2024”, 2025). While each hurricane inflicted substantial damage, their sequential occurrence compounded economic losses, highlighting the limitations of single-event triggers in capturing the full extent of financial exposure.

  
  

Data source: AccuWeather estimates more than $250 billion in damages and economic loss from LA wildfires

The fundamentals of aggregated loss structures are relatively straightforward but require careful calibration.

Losses are accumulated over a defined period, typically one to three years, and compared against predefined attachment and exhaustion points that determine when payouts begin and end. Additionally, event caps may be implemented to limit the contribution of any single disaster to the aggregate.

This structure enables insurers to secure coverage for a broader range of scenarios while allowing investors to assess risk more holistically. Swiss Re, a leader in reinsurance and ILS, has extensively documented the growing use of aggregated loss triggers, particularly in regions with high exposure to sequential events (“The Sigma Report: Aggregated Loss Structures in Cat Bonds,” 2024).

Despite aggregated loss structures' advantages, these present certain challenges:

• The complex design of these mechanisms can pose difficulties for issuers, particularly when calibrating thresholds to balance affordability with sufficient coverage.

• Reliance on high-quality and timely data, as accurate aggregation remains a challenge in some underdeveloped regions.

• Aggregated structures introduce a layer of uncertainty for investors, as payouts depend on the accumulation of multiple events over time.

These limitations notwithstanding, the opportunities presented by aggregated loss structures are considerable. They align with the growing demand for financial instruments that address the realities of a changing climate, positioning Cat bonds as a critical tool for global resilience.

AI and Catastrophe Bonds

Recent advances in catastrophe modeling and predictive analytics through AI and Machine Learning, have further enhanced the functionality of aggregated loss structures. These can now lead to predictive algorithms which can optimise aggregated loss triggers by integrating vast datasets, including satellite imagery, IoT sensors, and historical weather patterns.

Companies such as RMS and AIR Worldwide (now Verisk) have integrated real-time data and machine learning into their models, enabling more accurate simulations of multi-event risks. For example, RMS’s latest modelling suite incorporates dynamic climate data to predict not only the occurrence of individual disasters but also their potential clustering within a defined period (“Catastrophe Modeling in a Changing Climate,” 2024). Such innovations allow for more precise calibration of attachment and exhaustion points, enhancing the effectiveness of aggregated loss triggers.

Following the aforementioned case of Los Angeles’s wildfires in 2025 and hurricanes Helene and Milto in 2024 provide vivid illustrations of the risks associated with climate-driven disasters. While any single wildfire or hurricane might not breach a loss threshold, the cumulative impact of these events over a season could result in severe financial losses. Aggregated loss structures address this gap by triggering payouts based on combined losses, ensuring that insurers receive the liquidity they need to respond effectively to escalating claims.

In conclusion, aggregated loss structures in Cat bonds have transitioned from a niche innovation to a necessity in the face of escalating disaster risks. As climate change continues to amplify the frequency and severity of natural disasters, these structures provide a robust framework for addressing cumulative exposures, offering benefits to both issuers and investors.

The increasing adoption of aggregated loss mechanisms, supported by advancements in data analytics and climate modelling, underscores their importance as a cornerstone of disaster resilience financing. The lessons from recent events, such as the Los Angeles fires, Valencia floods, and hurricanes Helene and Milto, demonstrate the critical role of these structures in safeguarding financial stability in a rapidly changing world.

We hope this exploration of aggregated loss structures has provided valuable insights into their pivotal role in the modern financial landscape. Stay tuned for our next article.

Until then, thank you for joining us, and we look forward to welcoming you back for the next discussion!

-Ultrai

References

1. "The Sigma Report: Aggregated Loss Structures in Cat Bonds" by Swiss Re, (2024).

2. "Natural Disaster Figures 2024" by Munich Re, (2025).

3. "Catastrophe Modelling in a Changing Climate" by RMS, (2024).

4. "Investor Perspectives on Aggregated Risk" by Nephila Capital, (2025).

5. "Coverage of Los Angeles Wildfires and Insurance Impacts" by The Financial Times, (2025).

6. "Valencia Floods Highlight Increasing Climate Risks" by Bloomberg, (2025).