Swiss Re Insurance-Linked Fund Management

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Insurance-linked securities cited as investment asset to withstand recession


Yet again insurance-linked securities and catastrophe bonds are being held up as great investment assets in the current uncertain global economic climate and once again Australia is where the discussion is coming from. In their latest Ibbotson Insight article titled ‘Capital Preservation for Australian Investors‘, their Head of Alternative Investments Michael Coop says investors should diversify into assets that are not overly affected by recession.

One example of such an asset that would withstand a recession is insurance-linked securities, says Coop, calling them effective fundamental diversifiers. He points out the unique fundamental risks associated with ILS and cat bonds, that they are linked to peak events and that investors could lose 100% of their investment should those risks occur. Coop also points out that the returns and premium can vary depending on the wider insurance market and whether rates are rising or falling.

Recessions do not cause the extreme events that can cause cat bonds and ILS to be triggered, however the article does note that an extreme event can cause a local recession. Coop also points out that the risk of losing your investment with ILS or cat bonds can be greatly minimised by ensuring a diversified portfolio of different ILS risks is maintained.

He closes the ILS section of the article by stating:

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From a total portfolio perspective, ILS is attractive because the factors that cause losses in equities and bonds do not cause losses in ILS, so having them in the portfolio reduces total portfolio losses.

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