A synthetic approach

Insurance-linked securities offer safety in numbers

In tandem with the growth of the insurance-linked securities market itself, many are forecasting a sharp increase in the volume of insurance-linked derivatives. These tend to take the form of catastrophe swaps – which are essentially synthetic ILWs. Insurance derivatives could draw more insurance companies into the market, as proponents argue that they will replicate cat bonds but at a fraction of the cost (see Insurance and capital markets converge, Euromoney, April 2008).