Diversification

An investment strategy of spreading capital across different assets whose outcomes are not related.

Because investment returns from insurance-linked securities, such as catastrophe bonds, are not correlated with financial markets, they can be a powerful source of diversification for a traditional portfolio.

By diversifying investments, an investor can smooth out the effects of one asset class or type performing badly, while still generating returns from others that do well.

With cat bonds and ILS performance solely linked to the performance of the underlying insurance and reinsurance business, they are seen to be relatively uncorrelated with broader financial markets and other asset classes such as equities or more traditional fixed income.