The ability of insurance-linked securities investments to deliver a differentiated source of returns compared to broader capital market instruments remains primary in the list of motivations for investing into the asset class, analysis from Gallagher Securities found.
Catastrophe bonds and similar insurance-linked securities (ILS) are seen as the main type of assets in focus and it’s no surprise given their properties match many of the motivators investors have for accessing returns from the insurance and reinsurance market.
Insurance-linked securities already tend to sit in the alternative bucket for institutional allocators and the fact they are differentiated, while also driving attractive returns over the long-term is key.
Gallagher Securities listed the main motivators that investors cited for accessing the asset class.
Top is noncorrelation to public markets, the fact ILS and other reinsurance instruments can deliver “steady returns that are not linked to the ups and downs of the broader financial markets,” which has always been a key feature of the market and something that differentiates it from even the majority of other alternative asset classes.
While catastrophe bonds and ILS can never be said to 100% uncorrelated, tail or significant loss events have the potential to drive elements of correlation (although this tends to be rare and short-lived), they are largely uncorrelated and through the majority of the duration of an investment will move in a manner that differentiates their returns from almost all other asset classes.
Second highest in the ranking of investor motivations for allocating to ILS and reinsurance is the fact these instruments can deliver direct exposure and access to the returns of pure insurance underwriting.
Cat bonds and similar ILS are largely remote to counterparty and sponsor related risk, with the investments solely deriving their returns from the performance of underwritten business.
“This distinguishes many forms of ILS (e.g., cat bonds) from investments in insurance companies’ equity, for example. The latter also involves having confidence in insurers’ operational performance or their asset management,” Gallagher Securities explained.
The broker-dealer further stated, “For some specialist investors, this driver is also linked to a “complexity premium.” In other words, such pure-play insurance exposures are only available through relatively sophisticated financial vehicles, such as catastrophe bonds or sidecar structures, which take time and expertise to access.”
Third in the ranking of motivators is the total-return potential across market cycles, on which Gallagher Securities highlighted, “As well as being uncorrelated to public markets, insurance returns have been reliably positive, with only a single (slightly) negative year in the past decade.”
Diversification, from a portfolio construction point of view and within the ILS and reinsurance linked asset class comes in fourth, as investors again cite the fact these are differentiated to other assets in their portfolios, while some investors also diversify within insurance risk, across natural catastrophe, specialty, life etc.
The fifth motivator is the fact these instruments can deliver regular income from a fee-based business model, Gallagher Securities found. Here, this is really focused on some instruments such as reinsurance sidecars, where recurring income and fee‑linked earnings are on offer to both risk originators and investors, in some cases.
Sixth is gaining access to fixed pools of capital and seventh is the ESG characteristics of the asset class.
It’s perhaps notable and reflective of broader investment and social trends that ESG comes in seventh as a motivator for investing in ILS, having previously tended to rank higher in other studies of investor motivations for entering into the asset class. But we should also highlight that Gallagher Securities only asked respondents to rank these seven characteristics of the ILS asset class in order of importance.
Also read:
– Notable rise in ILS investor appetite and sophistication evident in 2026: Gallagher Re.
– 60% of institutional investors intend to increase ILS allocations: Gallagher Securities survey.
– ILS / non-traditional capital a “critical extension” of traditional reinsurance: Bolding, Gallagher Securities.
