What are ILS?
Imagine if you could invest in insurance, just like you invest in stocks or bonds. That’s the big idea behind Insurance Linked Securities (ILS). These are special financial products where the payout depends on the occurrence of big insurance events—like natural disasters, pandemics, or cyber attacks.
Why Does London Care?
London is already a global heavyweight in insurance and reinsurance. That’s why the UK set up new rules in 2017 to attract ILS deals—making it easier and more appealing for investors and insurance companies to do business here.
How Do ILS Work?
Here’s how it works, step by step:
An insurance company wants to protect itself from large, rare events.
They use a special company (an ISPV) to create ILS, like “catastrophe bonds”—often called “cat bonds”—and sell them to investors.
Investors hand over money, which acts as a back-up fund. If a big event happens, the money helps pay the insurance claims.
If disaster doesn’t strike, investors get their money back plus extra earnings!
Sometimes, the structure is more complex (like in a “sidecar”), but the goal is the same: spread risk to outside investors.
What’s So Special About ILS?
Investment for All: Pension funds, hedge funds, and other big investors can now join the insurance market without needing an insurance license.
Alternative to Reinsurance: Traditional reinsurance passes risk from one insurer to another. ILS lets insurers tap into new sources of capital.
Choice of Triggers: Some ILS pay out based on actual losses; others use industry estimates or event parameters (like how strong an earthquake was).
The UK System
Since 2017, the UK lets companies create “Protected Cell Companies” (PCCs). Think of PCCs as a house with many rooms—each room is isolated, so any problems in one don’t affect the rest. Only specialist, “qualified” investors can buy these ILS, keeping things safe and professional.
Extra perks:
No taxes on ILS profits or investor interest
Fast approval (6-8 weeks, aiming to get even faster)
Real-World Examples
In 2018, Lloyd’s reinsurer Neon used a PCC for ILS, and SCOR issued a $300m “cat bond” to cover events like US storms and Canadian earthquakes.
Why Does It Matter?
The UK’s ILS regime makes London a top location for ILS deals. Insurers get more ways to manage risk, investors find new opportunities with steady returns, and everyone benefits from a stronger, more creative insurance market.