The Role Of ILS In Portfolio Diversification

Insurance-linked securities (ILS) are financial instruments issued by insurers and reinsurers to manage their exposure to low-frequency but high-severity losses. The ILS industry is continuing to evolve. This niche market has grown considerably since its origins back in 1997 as a response to the large losses insurers suffered by natural catastrophes (notably Hurricane Andrew in 1992) and is proving to be an increasingly attractive alternative asset class for sophisticated institutional investors, particularly pension funds.

Although some investors were arguably more cautious following the 2008 financial crisis, they seem to be getting more comfortable with the associated risk/reward profile that ILS products can offer. In fact, some commentators expect that the amount of capital seeking direct access to insurance and reinsurance risks from third-party investors and institutions will more than double to $150bn by 2020. The total global ILS sector is worth