The Purpose of ILS: Delivering value to both sponsors and investors

The ILS market exists and thrives because it provides significant and unique advantages to both parties in the transaction.

Purpose of ILS for Sponsors (Insurers, Reinsurers, Corporations, Governments):

• Massive, Diversified Capital: The ILS market provides access to the entire global capital markets (estimated in the trillions of dollars), a pool of capital vastly larger than the entire traditional reinsurance industry. This provides a deep and diversified source of protection.
• Fully Collateralized Protection: This represents a significant benefit. The capital from investors is fully committed at the outset and secured in a trust. Consequently, the sponsor encounters no credit risk. They are assured that the funds are available should they require them. In contrast, a conventional reinsurer may default and be incapable of settling claims following a truly massive global catastrophe event.
• Competitive Pricing & Customization: ILS can often provide protection at a more efficient price than traditional reinsurance, especially for very large, remote layers of risk. The structures can also be precisely tailored to the sponsor’s needs.

Purpose of ILS for Investors (Pension Funds, Endowments, Sovereign Wealth Funds, Family Offices):

• Attractive, High-Yield Returns: ILS generally provides higher returns in comparison to other fixed-income securities with a comparable level of risk. The premiums obtained serve as compensation for assuming a risk that is clearly defined and can be accurately modeled.
• True Diversification: This is the primary investment thesis for ILS. The performance of an ILS is driven by physical events (like weather or geology), not by economic events (like recessions, inflation, or market crashes). An ILS portfolio can serve  as an effective  diversifying agent, enhancing the risk/return profile of a larger investment portfolio.
• Low Volatility (in most market conditions): Because they are not tied to economic sentiment, ILS valuations generally exhibit stability and are unaffected by the daily fluctuations of stock and bond markets.