Investors continue to look for new ways to improve returns in the current low-yield fixed income environment. They are also seeking new sources of diversification as global markets become more correlated.

Catastrophe bonds (or “cat bonds”) offer a solution to both challenges. Insurers use catastrophe bonds to replace traditional reinsurance by paying investors to assume a portion of the risks associated with major natural events, such as a hurricanes or earthquakes. To attract these investors, insurers offer them the opportunity to earn higher yields. Catastrophe bonds also offer diversification benefits because they are not influenced by the economic and geopolitical factors that drive the performance of traditional assets, such as stocks and bonds.

Although the asset class comes with its own unique set of risks, it offers investors the potential to enhance the performance and the risk-return profiles of their portfolios.

Read our full perspective on finding an alternative approach to portfolio diversification.

* Source: Aon Benfield Securities, Inc.