Abstract
In this article, insurance-linked securities (ILS) are identified as a source of alternative beta. Against the payment of a risk premium, investors assume natural catastrophe and other insurance risks. Not only is the ILS risk premium generally relatively generous in comparison to the probability of loss, but, more importantly, the occurrence of an earthquake or hurricane event is independent from financial market events. This offers attractive opportunities for diversification. While the story of ILS being an advantageous addition to most investment portfolios is easily and convincingly told, there remains considerable market confusion about the precise identity and characteristics of ILS return drivers. The aim of this article is to address this and related questions, decompose ILS return into various return sources, distinguish between their alpha and beta parts, and analyze each in detail.
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