Insurance-linked securities (ILS)
Insurance-linked securities (ILS) are financial instruments that transfer insurance risk to capital-market investors. The best-known example is the catastrophe bond, which pays insurers if a defined disaster occurs.
With an ILS transaction, an insurer or reinsurer moves a specific risk, such as losses from hurricanes or earthquakes, into a security that investors buy. Investors earn a return in years without a triggering event, but they can lose principal if the covered event happens and a payout is owed. The most common form is the catastrophe bond, which typically matures in three to five years.
ILS give the insurance industry access to capital-market money that sits outside traditional reinsurance, so it is often called alternative capital. This broadens the pool of funds available to absorb large, correlated losses and can add capacity when reinsurance is scarce or costly.
For example, a property insurer worried about a severe hurricane season might sponsor a catastrophe bond that pays out if a storm of a defined severity strikes a defined region. Capital that flows through ILS structures is one of the sources reinsurers can draw on, including AI-native reinsurers like RiskCube Re that support carriers and MGAs writing catastrophe-exposed and other complex risks.
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.