While public and private insurance-linked securities (ILS) offer distinct pathways to insurance risk premia, the choice between them involves more than just a calculation of risk and return.According to Mark Gibson, Senior Investment Director at Schroders Capital, the true dividing line for investors is the degree of liquidity and transparency they are willing to trade for enhanced spreads and bespoke underwriting access.In a new report, Gibson highlights that while ILS has become a staple for those seeking low correlation and attractive yields, maximizing the asset class requires a strategic balance.By blending public cat bonds with private ILS, investors can moderate the structural trade-offs of each, pairing the liquidity of the bond market with the higher-yielding, customised potential of private contracts to suit their specific governance capacity and time horizons.

The report also acknowledges how ILS has become an established allocation option for investors that are seeking diversification, attractive spreads, and low correlation to traditional financial markets.This is highly evident in the current market environment, as both geopolitical uncertainty and market volatility continues to dominate headlines and impact on core equities and bond allocations and given the strong performance ILS have generated over both recent years, and the longer term.“Within the ILS universe, a fundamental distinction exists between private ILS – non-tradeable securities that are typically structured as collateralised reinsurance contracts – and public ILS, most commonly issued as catastrophe bonds (‘cat bonds’) and traded in the secondary market,” Gibson said.

According to Gibson, from an investor’s perspective, liquidity is one of the key differentiators between public and private ILS.“Public cat bonds trade in an active, over the counter-style secondary market.Investors can adjust exposures, raise cash, or manage risk dynamically.

Prices move in response to market conditions, catastrophe events and spread changes, resulting in observable mark-to-market volatility.“Private ILS, in contrast, are effectively locked until maturity and so are not subject to market pricing volatility.There is no secondary market, although it could be possible to enter into a hedge if necessary.

Invested capital is fully paid up for the contract period, and in the event of a catastrophe, the collateral may become ‘trapped’ until ultimate loss development is clarified.This can extend well beyond the contractual maturity date,” Gibson explained.Adding: “It is worth noting that collateral can also be trapped within a cat bond by means of maturity date extensions and the payment of an extension spread by the sponsor.

Generally, though, it is more likely for collateral to be trapped in a private ILS transaction than a cat bond, because the latter tends to sit at more remote levels within reinsurance programmes.” Historically, private ILS deals typically tend to offer higher spreads in comparison to public catastrophe bonds, which reflects an illiquidity premium, negotiation-based pricing, and access to less standardised or lower-layer risks.At the same time, during a hard reinsurance market, private deals can reprice quickly due to their shorter risk periods, and so these tend to offer attractive expected returns.Nevertheless, as Gibson points out, public cat bonds generally provide marginally lower spreads, yet they gain from competitive issuance processes and wider investor engagement.

The pricing remains transparent, and risk-adjusted returns can be seen throughout the market.“However, realised returns for any ILS depend on loss activity and structural features.Private ILS are often indemnity-triggered, meaning payouts depend on the (re)insurer’s actual losses.

This exposes investors to claims development risk and potential delays in loss settlement.In addition to indemnity triggers, cat bonds frequently use non-indemnity triggers such as parametric, modelled loss, or insurance industry loss indices, which can reduce settlement uncertainty.Reported volatility can therefore be misleading.

Private ILS may appear smoother due to the absence of mark-to-market pricing, yet underlying structural risk, especially in multi-event years, may be greater,” Gibson added.Furthermore, Gibson also emphasises that public catastrophe bonds can provide extensive disclosure through offering memoranda and modelling data.Given that some issues are rated, and independent catastrophe modelling firms provide risk metrics, this enhances comparability across deals and supports price discovery.

On the other hand, private ILS transactions are confidential and vary in documentation quality.Investors heavily rely on manager expertise, underwriting capability, legal review, and catastrophe modelling interpretation, during the process of a private ILS transaction.Gibson also outlines that operational oversight, such as monitoring claims, collateral accounts, and legal wording, is more intensive.

Ultimately, this creates a notable dispersion in outcomes between managers in the private ILS market.To conclude, Gibson affirms that both private and public ILS represent two structurally distinct pathways to accessing insurance risk premia.“Public cat bonds offer liquidity, transparency, and standardisation – but at the cost of lower spreads and mark-to-market volatility.

Private ILS provide customisation and potentially higher returns – but introduce illiquidity, operational complexity, and greater dependence on manager expertise.“For investors, the dividing line is not merely one of return and risk.It is a question of how much liquidity and transparency they are prepared to forego in pursuit of additional spread and underwriting access.

The appropriate mix in a portfolio will reflect governance capacity, appetite for illiquidity and time horizon.In many cases a measured allocation across both public and private segments provides a pragmatic way to access insurance risk premia while moderating structural trade-offs.”.All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

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