Insurance-linked securities (“ILS”) are securities and derivatives that transfer catastrophic natural event risk from insurers and reinsurers to capital markets investors. The ILS market emerged in the mid-1990s as several weather events awoke the industry to the significant financial impacts of large catastrophes. The strategy for this asset class fundamentally involves the assumption of loss from natural catastrophes in exchange for a risk premium, thus creating absolute and risk-adjusted return potential and diversification benefits that are largely independent of more traditional asset classes.
The ILS universe is comprised of various investment instruments, including:
Collateralized reinsurance investments
OTC catastrophe derivatives and Industry Loss Warranty (“ILW”) contracts