The New Alternative Asset: Insurance-Linked Securities

Abstract

The current low interest rate environment leaves many pension funds and other institutional investors in search of investment opportunities in high-yielding asset classes. One high-yielding alternative asset class receiving interest from investors is insurance-linked securities (ILS). Investments in insurance-related risks, such those linked to natural catastrophes (e.g., hurricanes) can provide investment opportunities with reduced correlation to more-traditional equity or fixed-income investment classes. Various forms of ILS investments, often utilizing securitization structures, allow investors to participate in the performance of the underlying insurance business. Investors in ILS use different investment strategies either to maximize returns or to diversify their portfolios within the asset class. The growth of the ILS market is expected to continue given the increased interest from investors. The article provides an overview of the ILS market, its products, and various investment strategies.

TOPICS: Fixed income and structured finance, project finance