Those such instruments that are linked to property losses due to natural catastrophes represent a unique asset class, the return from which is uncorrelated with that of the general financial market.
The risk from low severity, high probability events can be diversified by writing a large number of similar policies.
Insurance-linked securities provide life insurance companies with the ability to transfer or spread their risk while releasing its value to the open market through asset-backed notes.
The collapse of sub-prime collateralized debt obligations, or CDOs, had a disastrous effect on all structured financial markets, including life insurance risk.
The high complexity of life insurance securitization is one of the reasons for the collapse of the insurance-linked securities market.
This makes re-insuring these contracts more attractive because it opens a whole market for them to be sold and for risk to be spread among many investors.
It is much more attractive to write expensive, risky policies and share the risk with thousands of others than it is for one firm to assume total liability.