Investors are expected to continue ploughing money into insurance-linked securities at an ever greater pace this year — with most of the activity centred on Bermuda.

And analysis by PwC suggests that third-party capital is there as part of long-term diversification strategies and not because it’s starved of yield elsewhere.

Insurance-linked securities, such as catastrophe bonds, allow investors to gain attractive yields in return for exposing their capital to risks such as Florida windstorm or California earthquake, and be triggered by losses on a specific scale.

Experts from professional services firm PwC Bermuda were attending the SIFMA (Securities Industry & Financial Markets Association) annual Insurance and Risk Linked Securities Conference in New York this week.

Arthur Wightman, insurance leader at PwC Bermuda, said: “The level of transactional activity is at a higher point than we have seen in the last several years and we expect to see the number of new incorporations of reinsurance entities grow in 2014. Consistent with 2001 and 2006 activity, it’s concentrated in Bermuda once again affirming the attractiveness of the domicile as a sophisticated centre of excellence for reinsurance and innovation.”

Mr Wightman continued: “We do expect to see the model evolve in property catastrophe reinsurance — perhaps not as dramatically as some might suggest — both within existing participants as well as new businesses being formed.”

Scott Watson-Brown, alternative investments leader, PwC Bermuda, suggest many ILS investors have a profound understanding of the risks they are taking.

“Our analysis points to an investor base that demonstrates a fundamental understanding of the risks to which its capital is exposed; portfolio allocations are made with this understanding, and allocations are being made following months or even years of in-depth due diligence.”

He added: “For any new investor interested in insurance-linked securities or other types of investment in reinsurance, it is critical to have a precise understanding of how a bond or similar structure will perform in the instance of a catastrophic loss and just what spectrum of risks you are exposed to.”

A number of new transactions highlight opportunities to provide coverage to risk managers who might have retained risk in the past. The market has seen a surge of activity by reinsurers as they develop third-party capital management divisions.

For some, Mr Watson-Brown said, this is an openly defensive move. Others are showing a commitment to take advantage of this broader interest from the capital markets, much broader than seen in past years.

For the relationship between the capital markets and risk transfer to be sustained over the long term these products must continue to perform, Mr Wightman said.

“In other words, it would be very damaging if an investor was surprised in any way by how an investment performed when an event occurred,” Mr Wightman added. “Likewise, if policyholders or counterparties were not well protected over the long-term the value proposition would evaporate quickly.”

He concluded: “The future is bright for a long-term relationship between the capital markets and reinsurance, but it will be important to retain an acute focus on the needs of clients who are hedging their exposures to some of the most damaging forces in nature.”