Insurance-Linked & Risk Markets

Tokenized Insurance Funds

Digital vehicles for climate-risk investing.

Investment Overview

Insurance-Linked Securities (ILS) and risk markets allow investors to profit from insurance and catastrophe risk through cat bonds, parametric insurance, and weather derivatives. Market size: $100B+ ILS market, $40B cat bonds outstanding (2024). Investment access via: (1) Cat bond funds (Stone Ridge, Plenum), (2) ILS ETFs (WIND - now defunct, direct funds only), (3) Parametric insurance platforms (Arbol, Descartes), (4) Weather derivative contracts. Returns: Cat bonds 5-10% yields with low correlation (0.0-0.2) to stocks. Risk: Catastrophic losses (hurricanes, earthquakes) can trigger 50-100% principal loss on individual bonds. Suitable for sophisticated investors seeking portfolio diversification and comfortable with tail risk.

Market Size

$100B+ ILS market, $40B cat bonds outstanding, $10B+ parametric insurance, $5B weather derivatives

Typical Returns

Cat bonds: 5-10% annual yield (zero loss years); -10% to -100% in catastrophe years; Average 4-7% long-term; Weather derivatives: -50% to +200% (binary outcomes)

Accessing Insurance-Linked Securities

Start with Diversified Cat Bond Funds

Stone Ridge Reinsurance Risk Premium funds offer diversified cat bond exposure. Minimum $25K-$100K (accredited). Target 5-8% annual returns. Diversification across 50-100 bonds reduces single-event risk. Historical returns: 5-7% annually with occasional -5 to -10% years (hurricanes).

Understand Catastrophe Bond Mechanics

Cat bonds pay high coupons (SOFR + 4-8%) but principal at risk if trigger event occurs (e.g., Category 4+ hurricane hits Florida). Triggers: Parametric (wind speed, earthquake magnitude) or indemnity (actual insurer losses). Parametric = faster payout but basis risk.

Explore Parametric Insurance Platforms

Arbol offers parametric weather insurance (drought, excess rain, temperature). Investors back policies, earn premiums. Returns: 8-15% target but volatile (climate events binary). Minimum $10K-$50K. Diversify across geographies and perils to reduce correlation.

Consider ILS as Portfolio Diversifier

Allocate 3-5% of portfolio to cat bonds for diversification. Combine with stocks/bonds in 55/35/10 portfolio (stocks/bonds/ILS). Historical: ILS reduces portfolio volatility by 0.5-1.0% while maintaining similar returns due to zero correlation.

Key Investment Platforms

Stone Ridge Reinsurance Risk Premium Fund

$25,000 (accredited only)

Leading cat bond fund. $5B+ AUM. Diversified across 50-100 cat bonds (hurricanes, earthquakes, severe weather). Minimum $25K (accredited). Returns: 5-7% annually average. 2017 (Hurricane Irma/Maria): -8%. 2018-2023: +5-9% annually. Institutional quality.

Stone Ridge Asset Management

Plenum Cat Bond Fund

$50,000 (accredited only)

Bermuda-domiciled cat bond fund. Portfolio: Global perils (US hurricanes, Japan earthquakes, European windstorms). Minimum $50K (accredited). Target 6-9% returns. Lower fees than Stone Ridge (1.0% vs. 1.5%). Quarterly liquidity (redemptions).

Plenum Investments

Fermat Capital (ILS Funds)

$100,000+ (institutional)

Insurance-linked securities manager. $1.5B AUM. Funds focus on cat bonds, collateralized reinsurance, quota shares. Minimum $100K-$1M (institutional). Returns: 7-10% target. Emphasizes downside protection via diversification and conservative underwriting.

https://fermatcapital.com

Arbol

$10,000+ per policy

Parametric weather insurance platform. Investors back policies for farmers, businesses facing weather risk. Premiums: 8-15% of coverage. Binary payouts: Weather trigger hits = pay claim; no trigger = keep premium. Minimum $10K-$50K. Climate data transparency via blockchain.

https://arbolmarket.com

Descartes Underwriting

$1,000,000 (institutional)

Parametric insurance MGA. Covers climate, cyber, specialty risks. Capital providers back underwriting. Returns: 10-15% target. Minimum $1M (institutional). Uses climate models and alternative data. Growing sector (parametric insurance $10B+ market).

https://descartesunderwriting.com

Insurance-Linked Securities Risks

Understanding these risks is critical before investing in tokenized insurance funds.

Catastrophe risk: Single major event (Category 5 hurricane, 8.0+ earthquake) can trigger 50-100% principal loss on individual bonds
Climate change: Increasing frequency/severity of events raises loss probabilities; historical models underestimate risk
Model risk: Cat bond pricing based on catastrophe models (RMS, AIR, CoreLogic); models can be wrong or outdated
Basis risk: Parametric triggers (wind speed) may not match actual losses; can trigger without insurer losses or vice versa
Correlation in tail events: Multiple bonds can trigger simultaneously (2017: Hurricanes Harvey, Irma, Maria within 6 weeks)
Liquidity: Cat bonds trade over-the-counter; limited secondary market; forced sales at 20-40% discounts possible

Due Diligence Checklist

Diversify across perils: Hold mix of hurricane, earthquake, severe weather, flood bonds; avoid concentration in single risk

Check geographic dispersion: Bonds covering US East Coast hurricanes correlate; add Japan quakes, Europe windstorms for true diversification

Assess trigger probability: Review catastrophe model outputs; understand attachment point (loss level triggering payout) and probability of exceedance

Verify model transparency: Demand disclosure of cat models used (RMS, AIR, CoreLogic); understand assumptions and limitations

Understand loss scenarios: What's maximum loss? 2017 Hurricane season = -8% for diversified funds; -50-100% for single-peril bonds

Compare to alternatives: Cat bonds 5-7% vs. high-yield bonds 7-9%; cat bonds offer diversification but lower yield and tail risk

Review fund track record: Stone Ridge has 15+ year history including 2017 hurricanes, 2011 Japan quake; test of strategy robustness

Allocate conservatively: Limit ILS to 3-5% of portfolio; treat as diversifier not core holding; accept occasional losses

Real-World Examples

Stone Ridge Fund (2007-2024): Average 6.2% annual returns. 2017 (hurricanes): -8%. 2018-2023: +5-9% annually. Zero correlation with S&P 500 (portfolio diversifier).

2017 Hurricane Season: Harvey, Irma, Maria caused $10B+ cat bond losses. Diversified funds: -5 to -10%. Single-peril bonds: -50 to -100%. Illustrated tail risk.

Japan Earthquake (2011): Triggered $3B+ in cat bond payouts. Some bonds lost 100% principal. Others unaffected (different triggers). Geographic diversification critical.

Why Consider Tokenized Insurance Funds?

High yields: Cat bonds offer 5-10% vs. 4-5% investment-grade corporates; compensation for tail risk

Zero correlation: Insurance losses uncorrelated with stock/bond markets (0.0-0.2 correlation); perfect diversifier

Short duration: Most cat bonds 1-3 years; lower interest rate sensitivity than traditional bonds

Defined risk: Maximum loss = 100% of principal; no margin calls or unlimited downside like levered positions

Climate opportunity: Rising catastrophe frequency/severity increases demand for risk transfer; growing market

Related Investment Opportunities in Insurance-Linked & Risk Markets

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