A recent commentary by Schroders Capital’s Vice Chairman of Insurance-Linked Securities (ILS) Dirk Lohmann highlights how the firm takes “an own view of risk” to enhance its ability to effectively model index-based catastrophe bonds, which ultimately helps the organisation to build resilient portfolios.“The insurance-linked securities (ILS) market has matured significantly over the past decade, attracting institutional investors seeking uncorrelated returns and resilience in volatile markets.Yet, as the market deepens, so too does its complexity.“Within catastrophe bonds (cat bonds), one of the largest and most liquid segments of the ILS universe, an important evolution is underway – particularly around index-based structures.” Lohmann stresses the importance of understanding the nuances and working with managers with the capabilities to take an independent, data-driven own view of risk can result in material differences in performance over time.

Moreover, Lohmann explains that throughout the last decade, index-based triggers have accounted for between 12% and 37% of annual catastrophe bond issuance, with nearly one in five outstanding cat bonds using this type of trigger as of mid-2025.“Such index triggers are often perceived as more transparent and objective than indemnity-based structures, which depend on the specific loss experience of an insurer or reinsurer.They also tend to exhibit less basis risk from an investor’s perspective, as payouts are based on standardised loss reporting rather than an individual sponsor’s claims handling or reserving practices,” Lohmann added.

“Taken together, these factors have contributed to tighter pricing for such bonds in recent years – particularly for those covering the dominant “peak perils” of North Atlantic windstorm and global earthquake.However, this perception of standardisation can mask significant differences in structure, exposure and model reliability.” Moving forward, Lohmann acknowledges how historically, index-triggered catastrophe bonds have been issued almost exclusively by reinsurers, reflecting the nature of their underlying portfolios.“Reinsurers typically manage thousands of contracts with varying renewal dates, risk models and exposure data, making aggregation complex and subject to model inconsistencies.

For such portfolios, index-based triggers are operationally simpler and less dependent on granular, up-to-date portfolio data.“Yet even in this more standardised segment, investors face important variations.Specifically, a significant proportion of index-based cat bonds – roughly two-thirds – provide “aggregate” coverage, meaning protection against multiple qualifying events in a given year,” Lohmann added.

The executive also stressed that when reinsurance sponsors come to the cat bond space with an index-triggered bond that provides protection against both peak and non-peak perils, relying on a vendor modelled expected loss for the pricing, it is worth questioning whether the sponsor believes the model view, or whether their own view of risk differs from the output.“At Schroders Capital, our ILS investment process begins with a fundamental question: does the model truly reflect reality? We assess the freshness of exposure data, the relevance of model versions, and the empirical validity of assumptions for each peril.Where data is outdated or model science lags behind observed loss trends, we make our own adjustments — applying in-house expertise to develop proprietary analyses or supplemental modelling,” Lohmann explained.

As per Lohmann, Schroders’ modelling approach considers event clustering, where certain climatic conditions make back-to-back events more likely, such as North Atlantic hurricanes or European windstorms within the same season.The executive also noted that Schroders adjusts for economic and inflationary changes in insured values when model data predates current exposures, which helps to ensure that the company’s expected loss estimates remain grounded in today’s realities rather than yesterday’s assumptions.To wrap up, Lohmann affirms that catastrophe bonds that use index-based triggers are not commoditised instruments, and that their attractiveness depends not only on headline yield but on the overall quality of the underlying data, the credibility of model assumptions, and the investor’s ability to interpret them independently.

“At Schroders Capital, we take an own view of risk to enhance our ability to model these bonds effectively.This ability to construct and continuously refine an internal view of catastrophe risk is a differentiator – enabling us to identify mispriced risk, avoid concentration in structurally weak segments, and build portfolios that can deliver resilient, risk-adjusted returns over time.“In an era of shifting climate patterns, evolving modelling science and rising economic exposure, the need for informed judgement and disciplined analysis has never been greater.

Not all index cat bonds are the same — and that’s precisely why independent thinking remains one of the most valuable assets in the ILS market,” Lohmann concludes..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.