Despite the fact insurance-linked securities (ILS) themselves have the tail-risk of major global natural catastrophe events firmly embedded in the asset class, as part of a broader alternatives allocation ILS are “particularly suitable for reducing tail risks” in investor portfolios, according to the BAI.

The German association for alternative investments, the BAI or the Bundesverband Alternative Investments e.V., recently undertook a study of alternative asset classes, looking at which can play a positive role in investor diversification and reducing correlation with major global events that can swing financial markets.

With the ILS asset class composed of largely natural catastrophe reinsurance risks, through instruments such as catastrophe bonds, collateralised reinsurance and other structures, it does harbor an inherent tail risk, the BAI notes, which manifests when major disasters occur and has driven down values.

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