Growth potential for ILS
There is substantial growth potential for insurance-linked strategies (ILS) in the current market, according to Dr Marcel Grandi, the portfolio manager and structurer of ILS, Zurich, Credit Suisse.The insurance market is highly inefficient, leading to opportunities to increase arbitrage, which would give investors increased returns, Grandi said. Because ILS are uncorrelated to moves in the financial markets, there is a much lower risk of bad returns.
ILS investors buy a portfolio of insurance-linked investment positions, which is then diversified across different regions and risk types such as floods, storms, and earthquakes. The capital for the investment is gathered from premiums paid for insurance against natural disasters. In the event of a natural disaster, the capital will reduce or be lost to the investor.
Increasing insurance premiums due to the capital shortage in the last quarter of 2008 and fewer investors entering the market has made ILS an even more attractive opportunity for those willing to invest, Grandi said.
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