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Nordic allocators turn to catastrophe bonds for diversification

Markets Group says CIOs are weighing ILS against fixed income that has lost some diversification as correlations tighten.

Reported · Written up by our desk · Reinsurance

Nordic institutional allocators are increasingly considering insurance-linked securities, with catastrophe bonds in particular, to complement traditional fixed income allocations, according to a new commentary from Markets Group.

The firm said the shift reflects a fixed income environment where traditional diversification has become harder to achieve, noting that correlations that once helped provide ballast across asset classes have tightened in periods of market stress.

Markets Group, citing author Kevin Gordon, pointed to a broader backdrop of geopolitical instability, shifting global alliances, and early stage policy disruptions linked to the United States, framing the discussion among decision makers around whether return premiums adequately compensate for tail risks.

Gordon added that several Nordic allocators have concluded that additional expected return of roughly 2.0% to 3.0% may not be enough to justify tail risk if assumptions about global stability prove wrong, driving demand for return streams they view as structurally different from government bonds and investment grade credit.

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