Insurance-Linked Securities (ILS)
Okay kiddo, let me explain insurance-linked securities (ILS) to you like you’re 5 years old. An insurance company is like your piggy bank, where you keep all your money safe. Sometimes when something bad happens, like you accidentally broke your mom's vase or your toy broke when playing, you take money out of it to make things right.
Now, imagine the insurance company has a lot of piggy banks and people put their money in them too to keep it safe. This is called ‘premiums’. And if something bad happens to any of those people, the insurance company uses the money from the piggy banks to help them out, just like you do when you take money out of your piggy bank.
But, big problems like natural disasters can happen that can make the insurance company lose all of its money from those piggy banks. So, to protect themselves, the insurance company can sell part of the risk to other people who want to invest in it. This is where an ILS comes in.
An ILS is like a game you play with other people where everyone chips in and bets on something bad happening. This could be a hurricane, a tornado, or an earthquake. The people who bet that nothing bad will happen, like your little brother who thinks nothing bad will happen because he’s never seen it happen before, put in money.
The people who bet that something bad will happen, like you who remember the last time a storm hit your town and all the damage it caused, put in more money. If something bad does happen, then the people who bet on something good happening will lose their money and it will be given to the people who bet on something bad happening. Just like in the game you play where you bet on something happening or not.
ILS helps insurance companies have enough money when something bad happens, and it also helps investors make some money if they bet correctly. That's it! I hope you got it. Do you have any questions?
Now, imagine the insurance company has a lot of piggy banks and people put their money in them too to keep it safe. This is called ‘premiums’. And if something bad happens to any of those people, the insurance company uses the money from the piggy banks to help them out, just like you do when you take money out of your piggy bank.
But, big problems like natural disasters can happen that can make the insurance company lose all of its money from those piggy banks. So, to protect themselves, the insurance company can sell part of the risk to other people who want to invest in it. This is where an ILS comes in.
An ILS is like a game you play with other people where everyone chips in and bets on something bad happening. This could be a hurricane, a tornado, or an earthquake. The people who bet that nothing bad will happen, like your little brother who thinks nothing bad will happen because he’s never seen it happen before, put in money.
The people who bet that something bad will happen, like you who remember the last time a storm hit your town and all the damage it caused, put in more money. If something bad does happen, then the people who bet on something good happening will lose their money and it will be given to the people who bet on something bad happening. Just like in the game you play where you bet on something happening or not.
ILS helps insurance companies have enough money when something bad happens, and it also helps investors make some money if they bet correctly. That's it! I hope you got it. Do you have any questions?