What is Correlation?
The statistical relationship between ILS returns and other asset classes. Low correlation to equities/credit is a key attraction for investors.
Correlation
The statistical relationship between ILS returns and other asset classes. Low correlation to equities/credit is a key attraction for investors.
How it works in practice
An ILS portfolio holds cat bonds covering Florida hurricane, Japanese earthquake, and European windstorm. Because hurricanes in the Atlantic have no physical connection to earthquakes in Japan, the correlation between these positions is near zero. If a Florida hurricane causes one bond to default, the Japanese and European bonds are unaffected. This low correlation with each other and with equity markets is what makes ILS attractive as a diversifying asset class.
Related glossary entries
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