Insurance Linked Securities

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Insurance Linked Securities [ILS], are essentially financial instruments sold to investors whose value is affected by an insured loss event. The term encompasses catastrophe bonds and other forms of risk-linked securitization.
Insurance linked securities are generally thought to have little to no correlation with the wider financial markets as their value is linked to non-financial risks such as natural disasters, longevity risk or life insurance mortality.

As securities, insurance linked securities are traded among investors on the secondary-market allowing insurers to offload risk and raise capital and also allowing life insurers to release the value in their policies by packaging them up and issuing them as asset-backed notes.

[source: Artemis]

ILS transaction

  1. Insurer approaches market to seek reinsurance capacity for catastrophe risk
  2. ILS Fund assesses proposed rate on line and considers whether appropriate for risk and offers suitable return
  3. ILS Fund provides funding to Cell to be able to fully collaterise maximum exposure under the contract
  4. Collateral funding is held in Reinsurance Trust Account or as security for LOC for benefit of Insurer
  5. Collateral and profit released very quickly at end of policy term in the event that there are no claims