Insurance-linked securities

Insurance-linked securities (ILS) are an effective way of increasing insurance capacity. Since its inception in 1996, the market for ILS has witnessed worldwide issuance in excess of USD 38 bn. A large number of the securities issued has been in the form of catastrophe bonds (cat bonds) whereby the capital markets provide capacity for low-frequency, high-severity natural catastrophes.

The market for cat bonds was first developed in the wake of reinsurance capacity shortage following two major catstrophic events, Hurricane Andrew in 1992 and the Northridge earthquake of 1994. Cat bonds increased the ability of insurers to continue providing insurance protection by transferring the risk to investors. Initially deemed "esoteric", cat bonds have gained acceptance among the largest global fixed-income investors. This growing acceptance reflects their attractiveness to both sponsors and investors. For insurers, reinsurers and an increasing number of corporations, cat bonds provide multi-year protection against natural catastrophes with no counterparty credit risk. Cat bonds offer investors attractive returns and the potential to diversify and reduce their portfolio risk, since cat bond defaults are essentially uncorrelated with defaults of most other securities.

The total volume of ILS outstanding has grown three-fold over the last five years, and is now over to USD 30 billion. Of this, two-thirds or USD 18 billion are life bonds, and the remaining USD 12 billion non-life. According to Swiss Re’s new sigma study “Securitization”, insurers and investors increasingly benefit from these new opportunities. Since total bonds outstanding are still just a small fraction of the potential market, issuance is likely to see strong growth going forward.

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Sigma no. 7/2006: Securitization - new opportunities for insurers and investors 


If you are an investor or trader or an insurer, reinsurer, or other entity seeking to hedge risk, please contact Swiss Re Capital Markets for further information about insurance-linked securities or tradable insurance risk.

Useful links:

Market loss index for Europe – expanding capital market capacity

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