Investors can earn the insurance premiums in this subset of insurance-linked securities
asset allocators are naturally looking at alternative sources of return, such as commodities, hedge fund strategies and digital assets. In the fixed-income asset class one such opportunity lies within catastrophe risk, a subset of insurance-linked securities .sophisticated market where investors provide insurance coverage on damage caused by natural disasters such as hurricanes, tsunamis, floods and earthquakes.
At end-March, global reinsurer capital is estimated to have totalled $650bn, of which $96bn comprised alternative capital or ILSs, up from $28bn in 2011. This is expected to further evolve as urbanisation causes an increased demand for insurance, while capacity for risk on reinsurers’ books remains limited.
ILS and specifically CAT bond exposure can play an important role in an investment portfolio, particularly as an alternative source of return, providing risk is uncorrelated with traditionalasset classes. The correlation of monthly US dollar returns of the global equity market and global bonds from the beginning of 2006 to the end of July 2021 was 0.4. Comparing each, in turn, to the SwissRe Global CAT Bond TR index yields a figure of 0.21 vs global equities, and 0.16 vs global bonds.
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