The economy has been heavily influenced by the fast way of life, different industries, and technological advances. Financial advisers have rather become commentators than predictors of how the stock market is going to develop.
The financial system has become very complex being interlinked over the computerized systems, and if we add the geopolitical situation, it is hard to predict economic events even in closer future like in a month, let alone in 6 months. The market volatility in low-interest rate surroundings is in some way dictated by the interconnections and makes it hard to gain investment returns for savers. Risk investments have significantly grown since 2008. Many investors and insurance companies take real risk investments to generate profit.
Real Risk Investments
Real risk investments sound discouraging, and one might ask why it is so popular. Investors tend to enter the risk and use the confusing market conditions to their benefit. Still, investment advisers seem not to be able to look beyond that theory of uncertainty.
The financial systems are connected on so many levels creating a confusing and complex system which makes it impossible for investment theories to work long-term.
Investment advisers stick to the theory that in today’s circumstances real risk investments are as simple as they can be: you either walk away with or without the money, period. One of the advantages of real risk investments is they don’t depend on either the success or the downfall of the market. In real risk investments, these events are less connected, and if something happens at another place, it will not necessarily influence the investment.
Real risk can generate returns when interest rates are high or when bonds rise in value, whereas the same possibility exists to lose all of it.
Where to Find High-Risk Investments
The market can be accessed by investing in the so-called CAT bonds (Catastrophe bonds). When buying the bonds, the reinsurer underwrites for the insurers who are now partly responsible for CAT risk. These risks include natural disasters like floods, earthquakes, hurricanes, crop damage, etc.
CAT bonds are closely connected to insurance securities and depend on the insurance results. Investors have been trying to find ways to make direct investments to become independent of banks, hence in case the bank is drowning, and it could take all of the investors’ money with it. That happened in 2008 when certain banks were forced to close, and the investors were left with nothing not even being able to reach their reinsurer. A direct contact with the reinsurer would reduce the risk of losing money in obscure events.
When you invest in CAT bonds, including premium, the investment is placed in a trust account. After the expiry of the contract, investors get back the capital, premium, and interest.
Guernsey’s ILS Industry
The ILS sector is the one which administers such businesses. The transactions exclude public consumption. Generally, the transactions are conducted between well-regulated parties, and the risk can amount to dozens of millions of dollars just for a single transaction.
The Guernsey’s ILS sector recorded significant growth lately. The ILS fund is preparing to buy CAT bonds, after consulting with experts, and it will be responsible for reinsurance transactions. Guernsey plans to invest in different reinsurance classes all over the world which will enable generating returns on the basis of consolidation rather than individual events.
Can Future Events Be Predicted After All?
As we said, the confusing system today makes it almost impossible to make any concrete predictions. The stock market cannot easily be predicted, but what is for sure, is that natural disasters will happen sooner or later, which will cause insurance losses. The risk is easy to predict here, and capital will be needed as a backup. Guernsey ILS fund seems ready and willing to take this gamble.