Insurance-linked securities (ILS) are a relatively recent financial innovation designed to allow risk to transfer from the insurance industry to the financial markets. Pension funds, banks and sovereign wealth funds are the largest holders of ILS, and hedge funds recently have started to specialize in managing ILS portfolios. Catastrophe (cat) bonds make up the largest segment of the ILS market. The cat bond market has grown to about $25 billion since the first issuance in 1994.
Cat bonds are sponsored by insurance companies and other entities to protect against catastrophe losses, including natural disasters and other extreme risks such as adverse mortality arising from pandemics. Cat bonds are sponsored by the entity desiring to reduce its exposure to risks, and/or to raise more capital so that it can offer more insurance to customers.
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