How Does Insurance Risk Compare to Stocks, Bonds, and Other Asset Classes?

Any investment decision involves a trade off between risk, return, diversification and other factors. To best understand the characteristics of insurance risk, we can compare it to more common investment options.

Insurance risk arises from the business of selling insurance policies to policyholders and paying those claims. Insurance is a product that is sold before knowing the true cost of producing that contract - that is, before the policyholder has actually incurred a loss.

So, what do we mean by investing in insurance risk? Quite simply, we want to participate in the Underwriting Profit or Underwriting Loss. Critically, we’re not interested in becoming an insurance company ourselves, having to decide on what risks to provide policies to and what premiums to charge, but rather provide a portion of the financial backing the insurance company needs to support these policies and receive in return a share of the reward.

While insurance risk has many unique characteristics, the core levers upon which investors make decisions are the same as any other type of asset. A compare and contrast between insurance risk and more common assets can assist in the understanding of insurance risk.

There are many types of risk & return that insurance companies are exposed to that are intertwined with the success of the insurance portfolio, such as investment income on reserve and credit risk. However, when we talk about insurance risk investing, we're focusing specifically on underwriting risk - the core risk of whether premiums collected will be enough to cover claims and expenses.

It's important to distinguish between two different ways to invest in insurance risk:

1) Insurance-Linked Securities (like CAT bonds): Like regular bonds,you can lose your principal, but that's your maximum loss. Think of buying a $1,000 bond that might become worthless if a hurricane hits.

2) Pure insurance risk is different: you can actually owe more than you invested, just like an insurance company can face claims that exceed their reserves. The most famous example is Lloyd's of London Names - wealthy individuals who have backed insurance policies since the 1600s with their personal wealth. When disasters struck (like asbestos claims in the 1980s), some Names lost millions more than they had originally invested. They weren't just bondholders who lost their principal - they were true insurance partners sharing in unlimited liability.

This unlimited downside is what makes pure insurance risk unique and potentially lucrative - you're taking on the same risks as an insurance company owner, not just a bondholder.

There are many types of investment products available to retail investors. In this analysis we’ll consider a “standard” investment in each of these classes in an attempt to derive a relativity between them:

Investors use a lot of metrics to make decisions about their investments. The following components of investment decision making will be compared and contrasted:

How much you can expect to earn from your investment is the first thing most investors will consider with any investment. It's difficult to speak about Expected Returns in a vaccum without considering the risk of the investment, however, it is still a useful starting point.

The chart below can give us a rough idea of how to rank the expected returns of each investment. T-bonds and corporate bonds, considered sources of safety in a portfolio, have the lowest expected returns. On the other end, retail investors have easy access these days to options and cryptocurrencies, which all one needs to do is scroll through /r/wallstreetbets to see the potential for high returns.

In isolation, the return from insurance risk is moderate. Competitive pressures keep returns from being too far outsized. The ability to invest reserves at risk free rates dampens the required return on capital invested. As such we’re placing insurance risk in the vicinity of stocks and commodities.

SPY is the classic benchmark for equity investments. While CAT Bonds are a form of transformed insurance risk (more on this in a future article), they are a good proxy for the expected returns of insurance risk investments. The Swiss Re CAT Bond Index shows a 7.6% CAGR over the period of 2002-2024 versus 10.6% for the S&P 500.

No good investor is going to make an investment decision based solely on expected returns. Being able to stomach the volatility of the investment is a key factor in making a decision. For those that know they may need access to their capital in the near future, or cannot tolerate the drawdown potential of their investment, they would be best to avoid cryptocurrencies, options and even leveraged real estate.

Insurance risk is a bit of a mixed bag when it comes to volatility. On the one hand, we have a product that can produce large losses, but on the other hand, we have a product that is actuarial designed to expect a profit. Again using CAT bonds indices to compare, we find that the volatility of insurance risk comes in below SPY and even gold. This might make intuitive sense - most years, insurance companies expected to make a profit which is similar to the previous year's return though slightly higher or lower depending on what stage of the business cycle the insurance company is in. Of course, there are years where insurance companies experience unexpected large losses, which does lead to more volatility.

This is where we see the key difference between insurance-linked securities (like CAT bonds) and pure insurance risk.

Insurance risk has the potential to lose more than is put into it. Assuming an average premium of 3% of the policy limit (a rate on line of 3%), the theoretical maximum loss is 97% of limits deployed, or 32x the amount of money received.

In practice, actuarial science and diversification make extreme losses much less likely. For a well diversified carrier we might expect their capital to handle a300% loss ratio in catastrophe years, meaning that regulators are satisfied that their net losses will be limited to a maximum of 2x the premium.

While large potential liability sounds scary, it’s not the only asset class that retail can invest in which is exposed to potentially more loss than one puts in. Real estate is the largest access to leverage that the average person has. Margin accounts - allowing you to short stocks, buy on leverage, or sell derivatives - are also available to many. As such, the concept of losing more than you put in isn’t in itself a disqualifier for retail investors to invest in insurance.

This makes insurance risk a sophisticated investment - not because it's impossible to understand, but because the risk/reward profile requires careful consideration of scenarios beyond simple "win/lose" outcomes.

Insurance risk can be broadly categorized into Life & Health (L&H) risk and Property & Casualty (P&C) risk. The performance of L&H depends on changing likelihoods of mortality and injury, whereas extreme P&C risk is largely concerned with adverse natural events and legal trends.

The likelihood of a CAT 5 hurricane impairing your investment in insurance risk is completely uncorrelated with the broader markets. A much clearer relationship can be seen between bonds, commodities, real estate and the overall S&P500. Herein lies the diversification potential of insurance risk as a complementary asset to traditional asset classes. One important caveat is that CAT bonds and similar products have a component of their return that is correlated with prevailing interest rates.

Sophisticated retail investors increasingly understand that true diversification requires assets that perform independently of traditional markets. Discussion on forums often talk about using international stocks, gold, or even bitcoin to hedge against the volatility of the overall markets. The diversification potential of insurance risk is perhaps it's most compelling feature for those looking to tweak their portfolio.

As it stands today, investing into insurance risk is considered a highly sophisticated endeavor. This is the main motivation for Riskvest - investigating how this perception could be changed and open up the market for keen individuals to get involved.

Many CAT bonds are available for Qualified Institution Buyers (QIBs) through Rule 144A, which brought a level of standardization and additional liquidity opportunities to the market. QIBs as defined by the SEC are institutions with at least $100M of investments: critically for Riskvest's considerations, an individual person cannot purchase CAT bonds at primary issuance. To gain exposure to these investments, an individual must find indirect exposure through a fund or similar intermediary.

An irony is that many retail investors already navigate investments requiring similar analytical skills:

Reading through forums such as Bogleheads will show many examples of eager investors looking to learn about niche opportunities out there. Riskvest was created to ease this research for keen investors and aggregate the opportunities they have available to them.

Thanks to fractional shares, you can buy stocks, equities, cryptocurrencies and commodities with as little as $1, often even with free transactions. Derivatives and short strategies will require a nest egg before brokers will let you participate. Real Estate is often a large outlay for down payments, renovations and ongoing costs.

The Insurance Risk Mystery: Insurance risk falls somewhere in this spectrum, but exactly where is unclear - and that's a problem Riskvest aims to solve. Imagine you have $25,000 burning a hole in your pocket and want to invest it in a CAT bond. Where do you even start?

Riskvest is working to change that by mapping the actual pathways, minimum investments, and access requirements that currently exist.

The market for insurance risk outside of insurance companies is growing rapidly but still dwarfed by other asset classes. Swiss Re estimates that the CAT bond market currently sits at $55.8 billion and has grown at a 13.4% CAGR over the past 4.5 years. When compared to the total $62 trillion (July 2025) market cap of the US equities market (not to mention international, bonds, or real estate), it’s clear there is a long ways to go before insurance risk is no longer considered a niche investment.

Insurance securities trade infrequently in over-the-counter markets with wide bid-ask spreads. Unlike stocks where you can instantly see live prices and execute trades, CAT bonds might trade once a month or less. Price discovery relies on broker networks rather than transparent exchanges.

While insurance risk may seem exotic, it has familiar characteristics with existing types of investments. The core appeal is straightforward: when specific, measurable events occur - like a Category 4 hurricane hitting Miami - your investment is directly affected in predictable ways. For investors willing to learn the fundamentals, this creates an opportunity to make informed risk decisions based on natural phenomena rather than market psychology.

The question remains however, what exactly can I invest in to get exposure to this risk? Am I going to be on the hook for a maximum of 32x the amount of money I put in as in our example? The short answer is no - there are many ways in which insurance risk can be transformed such that they act more like Equities and Bonds and where you’re only exposed to losing at maximum your initial investment. This will be covered in Part 2: How Insurance Risk Is Transformed Into Investable Securities.