Public vs. private ILS: A practitioner’s guide to the key portfolio construction considerations
For investors looking to allocate to insurance-linked securities, understanding the difference between public and private securities – and how this impacts liquidity, risk characteristics and returns – is key.
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Insurance-linked securities (ILS) have become an established allocation option for investors seeking diversification, attractive spreads, and, importantly, low correlation to traditional financial markets.
This is especially true in the current market environment – as geopolitical uncertainty and market volatility continue 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.
Insurance-linked securities: a refresher
ILS are a form of protection bought primarily by insurers and reinsurers, and also some corporations and public entities, against the risks associated with specific, catastrophic natural events, for example hurricanes.
Whether public or private, the securities are issued by special purpose vehicles (SPVs) into which the capital invested is paid. Returns are made up of income yield from the underlying insurance premium, plus the return from low-risk instruments such as liquid money market funds that invested capital is used to purchase.
Crucially, ILS are exposed mostly to natural catastrophe risk, much of it weather-related. These hazards sit outside of the influence of geopolitics, economic cycles or shifts in broader market sentiment – so payouts are not affected by non-natural catastrophe events or broader volatility on global markets.
• Read more: Diversification, (un)correlation and long-term returns: The case for insurance-linked securities
Structural foundations
Having established the two principal channels through which insurance risk reaches investors – public and private ILS – it is worth examining how their structural architecture differs. While both ultimately transfer natural catastrophe exposure, the legal form, capital mechanics and alignment of interests diverge in ways that materially affect investor outcomes.
Public ILS (cat bonds) are capital markets instruments issued through SPVs, typically under the Securities and Exchange Commission’s Rule 144A. They are marketed broadly to investors globally, are listed on exchanges such as Bermuda or Luxembourg, and trade in a secondary market.
Documentation for cat bonds is standardised and includes offering circulars with detailed risk analysis (modelling) disclosures, as well as all of the typical service provider and trust agreement details.
Private ILS, by contrast, are bilaterally negotiated risk-transfer contracts between an insurer or reinsurer and an investor or ILS fund. A reinsurance broker may be involved. The dominant form is collateralised reinsurance, whereby investors fully collateralise (provide capital backing for) a specific reinsurance contract for a fixed term, typically between 6-12 months.
The key structural difference is therefore conceptual. Public ILS are tradeable securities issued by SPVs referencing a sponsor’s (re)insurance risk, whereas private ILS are reinsurance contracts funded by investors via the purchase of shares or notes in an SPV that is usually owned and managed by the reinsurance broker or the ILS manager.
To understand why public and private ILS behave differently in practice, it is necessary to examine how they sit within a broader reinsurance programme and where along the loss distribution curve investor capital is typically deployed.
Reinsurance programmes: layering protection
In economic terms, a reinsurance programme resembles a vertical capital stack. It is the arrangement of reinsurance contracts that a (re)insurer puts in place to transfer risk. The programme is typically organised in layers of coverage, with defined attachment and exhaustion points for each layer, to protect against losses above the insurer’s retained amount (this is known as excess of loss, non-proportional reinsurance).
Example reinsurance programme structure (excess of loss)
Source: Schroders Capital, 2026. For illustrative purposes only.
A reinsurance programme can also include an element of proportional reinsurance. One form of proportional reinsurance that is commonly found in the private ILS market is “quota share reinsurance”, also known as a “sidecar”, whereby a reinsured and reinsurer split a fixed percentage of premiums and losses on a defined portfolio of underlying insurance contracts.
Reinsurance programmes are multi-layered because ceding (re)insurers face losses of varying frequency and severity, and different layers allow risk to be transferred efficiently across that spectrum. Lower layers in the stack cover the risk of more frequent but smaller losses, whereas higher layers protect against less frequent but much larger losses. This vertical segmentation allows ceding (re)insurers to align the cost of protection with the statistical characteristics of their exposure.
Pricing dynamics reinforce this architecture. Risk becomes lower as you move up the tower, so pricing of the different layers takes that into account. Layering therefore allows ceding (re)insurers to optimise cost across the programme. Lower layers have higher absolute prices (and lower multiples to expected loss), while higher layers have lower absolute prices (and higher multiples to expected loss).
Layering also serves a practical purpose in capital formation. Few insurers relish the idea of absorbing large catastrophe losses alone. Layering enables reinsurers to spread the burden, stitching together capacity from traditional markets and, importantly, from the growing pool of capital in public cat bonds and private ILS funds (see chart above).
Capital efficiency sits at the heart of the exercise. Attachment levels reflect more than loss probabilities; they are calibrated against regulatory requirements, rating agency scrutiny and internal risk appetite.
In short, a multi-layered structure allows (re)insurers efficiently to match protection to their target retained risk profile, capital needs, and market pricing conditions, rather than buying a single, blunt block of coverage.
Liquidity and tradability
From an investor’s perspective, liquidity is one of the most important 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.
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, as illustrated above.
Advantages and disadvantages of public and private ILS: pricing and liquidity
Advantages | Disadvantages | |
Public ILS | Greater liquidity and flexibility, enabling easier portfolio rebalancing | Mark-to-market volatility can introduce performance swings unrelated to ultimate losses |
Private ILS | Lower observable volatility due to the absence of market pricing | Illiquid and more exposed to collateral trapping. Limited exit options. |
Source: Schroders Capital, 2026.
Return profile and spread dynamics
Liquidity considerations naturally feed into return expectations. Historically, private ILS have offered higher spreads than public cat bonds. This reflects an illiquidity premium, negotiation-based pricing, and access to less standardised or lower-layer risks.
In hard reinsurance markets, private deals can reprice quickly due to their shorter risk periods, and so offer attractive expected returns.
Public cat bonds, while typically offering slightly lower spreads, benefit from competitive issuance processes and broader investor participation. Pricing is transparent, and risk-adjusted returns are observable across 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.
Advantages and disadvantages of public and private ILS: return dynamics
Advantages | Disadvantages | |
Public ILS | Transparent pricing and standardised trigger mechanisms | Lower yields and exposed to spread volatility |
Private ILS | Potentially higher returns and access bespoke risk | Less transparent and have greater exposure to loss development uncertainty and manager skill dispersion |
Source: Schroders Capital, 2026.
Transparency and operational complexity
Beyond spread levels and expected loss, structural design also determines how information flows to investors and how risk is monitored over time. Transparency and operational oversight therefore become central to assessing relative attractiveness.
Public cat bonds provide extensive disclosure through offering memoranda and modelling data. Some issues are rated, and independent catastrophe modelling firms provide risk metrics. This enhances comparability across deals and supports price discovery.
Private ILS transactions are confidential and vary in documentation quality. Investors must rely heavily on manager expertise, underwriting capability, legal review, and catastrophe modelling interpretation. Operational oversight – such as monitoring claims, collateral accounts, and legal wordings – is more intensive.
This creates a notable dispersion in outcomes between managers in the private ILS space. Performance is more sensitive to underwriting discipline, structuring quality, and risk selection.
Advantages and disadvantages of public and private ILS: return dynamics
Advantages | Disadvantages | |
Public ILS | High transparency and standardisation | Less flexibility to tailor risk exposure |
Private ILS | Can be customised to fit a preferred risk/reward strategy | Higher operational burden and dependence on manager skill |
Source: Schroders Capital, 2026.
Risk characteristics
Both private and public ILS share core catastrophe risk exposure – typically US hurricane, Europe windstorm, or earthquake risk. However, structural differences influence secondary risks.
Typical secondary risks of public and private ILS
Public ILS | Private ILS |
• Market spread risk • Secondary market volatility | • Higher liquidity risk • Collateral trapping risk • Greater legal and wording risk • More exposure to indemnity-based loss creep |
Source: Schroders Capital, 2026.
Interestingly, private ILS may appear less volatile in reported returns due to the absence of daily mark-to-market pricing. Yet structural risk may actually be higher, particularly in multi-event years when collateral becomes trapped and capital recycling slows.
Portfolio construction considerations
For investors, the choice between private and public ILS often depends on mandate constraints and liquidity needs.
Who could public and private ILS appeal to?
Public ILS | Private ILS |
• Multi-asset portfolios requiring liquidity • Tactical allocators seeking flexibility • Investors sensitive to governance and transparency | • Long-term allocators with stable capital • Investors seeking yield enhancement • Those comfortable with illiquidity and underwriting risk |
Source: Schroders Capital, 2026.
Many sophisticated portfolios adopt a blended approach, combining a liquid core allocation to public cat bonds with an opportunistic sleeve of private collateralised reinsurance to capture spread premiums.
Conclusion
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.
Glossary of terms
Proportional reinsurance (quota share): | Proportional (quota share) reinsurance is a form of reinsurance in which the reinsurer receives a fixed percentage of premiums for a subject book of business and, in return, pays the same percentage of losses and expenses that arise on that book of business. |
Non-proportional reinsurance: | Non-proportional reinsurance is a form of reinsurance in which the reinsurer covers losses only above a specified retention (attachment point), rather than sharing premiums and losses proportionally, typically up to a defined limit. The premium is negotiated based on the risk to which the reinsurance is exposed. |
Industry loss warranty (ILW): | An industry loss warranty (ILW) is a contract that pays out when total losses to the insurance industry from a specified event exceed a predefined threshold, rather than being based on the individual cedent’s losses. The determination of the insurance industry loss is made by an independent third party. |
Excess of loss reinsurance | Excess of loss reinsurance is a form of non-proportional reinsurance in which the reinsurer indemnifies the cedent for losses exceeding a specified attachment level, up to an agreed limit. The trigger mechanism can either be a per occurrence trigger or an aggregate trigger. Per occurrence triggers are typically used for low probability high severity losses such as catastrophes. Aggregate triggers are typically used for higher probability, lower severity losses. |
Hard reinsurance market | A hard reinsurance market is a market environment in which reinsurance capacity is constrained and pricing increases materially, with reinsurers tightening terms and conditions. It is typically characterised by: • Rising premiums • Reduced available capacity • Higher attachment points • Lower limits offered • Stricter contract terms and exclusions • More disciplined underwriting Hard markets usually occur after: • Significant catastrophe losses • Capital depletion • Adverse loss development • Rising cost of capital |
Soft reinsurance market | A soft reinsurance market features abundant reinsurance capacity, lower pricing, and broader terms. |
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