The many and varied methods used to hedge and cover the risk associated with natural catastrophes mean that investors seeking these uncorrelated products have a variety of ways of investing in this market—all equally valid but offering different risks and rewards. Morton Lane of Lane Financial uses the metaphor of a small archipelago to explain the similarities and differences of these natural catastrophe ‘islands of opportunities’.


EASE OF INSURANCE RISK ENTRY AND EXIT MARKET EXIT


POTENTIALLY DELAYED EXIT


Reinsurance Equity Stocks


DEFINED EXIT


ocean’. As they have searched for acceptable returns uncorrelated with the main investment markets— common equity and corporate bonds—they have increasingly been willing to try alternative investments.


I LEVERAGE LATITUDES Side-cars Retro ILW


Colateralised ILS CWILW


ILW RATABLE LATITUDES Indemnity ILS


Indexed ILS


INVESTMENT GRADE


EQUITY MARKETS TERRITORIES


HEDGE FUND TERRITORIES MULTI-STRATEGIES SPECIALISED


Mortality ILS


True alternative investments are hard to find. The


largest groups of these products are not, in fact, true investments but methods of trading—via hedge funds, special algorithms, insights and high-frequency procedures. Ideally these work whether the underlying market is moving up or down, and some actually do.


One such group of products that appears to meet the


test of decent returns and low correlation is investments in entities that provide protection against natural catastrophes: re/insurance. Natural


catastrophes


do not emanate from financial events; financial catastrophes are rare and are rarely occasioned by natural events. This means that returns to investors who provide natural catastrophe protection are not correlated with manufacturers and banks.


nvestigations of the metaphorical Securities Sea in recent years have led many investors into the relatively unchartered waters of the ‘alternative


October 2011 | INTELLIGENT INSURER | 39


MER DE UNINSURABLE


TRADE WINDS


Returns


Risks or Volatility


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