The benefits that ILS offer to insurers and reinsurers include additional ways to manage risk, additional capacity, diversification of counterparties, potential reduction of credit risk (i.e. in collateralised transactions) and, in some cases, a way to obtain financing.

The benefits that ILS offer to investors include the opportunity to obtain attractive returns and to diversify an investment portfolio since the return on ILS is dependent on the occurrence of triggering events and is generally uncorrelated to the return on other asset classes.

In an ILS transaction, payment is usually dependent on the occurrence of such a triggering event, of which there are four basic types…

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