Schroders Global Investment has stated in a report that one way for investors to enter the insurance market is by investing in Insurance-Linked Securities (ILS). Insurance-Linked securities are a way for insurance companies to manage risk and generate potential profits by transferring some of the insurance risk to investors in the capital markets. The non-correlation of insurance-linked securities helps to reduce portfolio risk. Due to their connection to specific insurance risks, these securities may exhibit stronger resilience and serve as a hedging tool to mitigate the impact of overall financial market downturns on portfolios. Many insurance-linked securities offer attractive yields to compensate investors for bearing insurance risk, providing a potential source of income that is not affected by interest rate fluctuations or stock dividends. Schroders Global Investment points out that there are various forms of insurance-linked securities available in the market, including publicly tradable investment instruments issued by special purpose vehicles (such as catastrophe bonds) and private, non-tradable instruments (including preferred shares and government bonds). These securities have different structures compared to corporate or sovereign bonds. Unlike traditional bonds, the value of catastrophe bonds is not directly affected by the issuer's credit risk, with the focus instead being on the probability of the risk event occurring. For catastrophe bonds and other insurance-linked securities, if no trigger event such as a hurricane occurs during the designated period, investors will receive periodic coupon interest payments based on the premium. The principal will be repaid at the end of the investment period. However, if a specific event occurs, part or all of the principal will be used to cover insurance losses, resulting in a reduction or cessation of coupon interest payments to investors. The repayment amount of the principal at maturity may decrease or even drop to zero. Therefore, natural (non-corporate) events can impact the performance of insurance-linked securities. This means that the performance of insurance-linked securities is not correlated with traditional asset classes, with returns on traditional asset classes being more closely tied to factors such as economic conditions, corporate performance, or geopolitical issues. Schroders Global Investment states that investing in insurance-linked securities offers several advantages over corporate bonds, particularly in terms of economic risk. The main advantages include low correlation and diversification. Insurance-linked securities are not directly correlated to traditional asset classes like stocks and bonds, reflecting their performance being less influenced by financial market volatility or economic conditions. Investors need not worry about the possibility of recent rate hikes and their impact on the economy, or the possibility of an economic "soft landing" or recession in 2024. Catastrophe bonds and other insurance-linked securities have a unique source of returns, with the risk premium coming from the probability of certain natural disasters occurring. As a result, catastrophe bonds are not correlated with credit cycles or other asset classes and serve as a tool for diversification in a portfolio. Furthermore, the yield of insurance-linked securities is attractive. Due to the nature of the risks involved, these bonds typically offer higher coupon interest rates than traditional fixed-income securities. The yield is intended to compensate investors for bearing insurance risk. Compared to traditional corporate bonds, investing in insurance-linked securities converts credit risk into climate-related risks. Corporate bonds are influenced by the issuer's creditworthiness, while insurance-related investments are related to specific natural events. This is why most insurance-linked investment instruments do not receive institutional ratings like corporate or government bonds. The shift in risk profile can provide diversification benefits to investors, especially during economic downturns when credit risks are typically on the rise.