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Institutional investors have piled into insurance-linked securities (ILS) with the goal of adding reliable returns and a touch of diversification to their investment strategies.
- A series of natural catastrophes has made investors more aware of the risks embodied in insurance-linked securities
- ILS have proven less liquid than expected in the wake of these disasters
- Catastrophe bonds are the most traditional and most liquid ILS instrument
A series of natural catastrophes that hit the world in the past three years has taught them that they have incorporated the potential for large losses into their portfolios.
A relatively young asset class, ILS investments have been put to test since the summer of 2017, as a destructive series of hurricanes, earthquakes, floods and wildfires shot insurance losses through the roof. They also affected investments that, to some extent, constitute a bet that catastrophic events will not happen, or at least will not be too severe in terms of property destruction.